The right funding depends on where your company is today:
Each option has a different cost, different terms and a different effect on ownership. Use the decision tree below to see which fits your company.
If no (the company is already sustainably profitable): Take bank debt.
If yes (the company is not yet profitable): go to question 2.
If no: Raise equity.
Raise equity from investors who can help you build your management team.
If yes: go to question 3.
If no: Raise equity.
Raise equity from investors interested in earlier stage investments.
If yes: go to question 4.
If no: Raise equity.
If yes: consider venture debt.
Consider venture debt.
Growth capital without giving up equity at a valuation that undersells your company.
In short: bank debt suits companies that are already profitable. Venture capital (equity) suits companies that still need to build their management team or are earlier stage. Venture debt suits companies that are not yet profitable but have an experienced management team, expect fast revenue growth, and believe current equity valuations undervalue the business.
Take bank debt when your company is already sustainably profitable and can comfortably cover loan payments from cash flow. It is usually the cheapest form of capital. In exchange, banks typically require personal guarantees and strict covenants. Payments are due whatever revenue does, which makes bank debt risky for early-stage companies with uneven revenue.
Raise venture capital (equity) when your company is early stage and needs investors’ help to build its management team. It is also the right choice when you are aiming for hyper-growth (10x or more) but can’t yet show the revenue to support debt. Venture capital never has to be repaid. The cost is ownership: each round dilutes founders, and investors often take board seats. Over the life of a company, it is usually the most expensive form of capital.
Use venture debt when your company isn’t yet profitable but has a strong management team, fast-growing revenue, and equity offers that undervalue the business. It provides growth capital without selling shares at a low valuation.
Venture debt is a term loan, but it differs from a bank loan in three ways: covenants are lighter, personal guarantees aren’t required, and loan sizes are larger. The lender usually takes warrants worth about 1-3% of equity, so founders keep 97-99% of their company.
Flow Capital provides interest-only venture debt of $1–15 million to high-growth technology companies in the US, Canada and the UK. Companies use it to extend runway, bridge to an equity round, fund large purchases, top up a recent round, or fund growth directly. See 6 uses of venture debt, or read The Founder’s Guide to Venture Debt.
With revenue-based financing, you repay a fixed percentage of monthly revenue until a pre-agreed cap is reached. Payments flex with revenue, but they can drag on growth, and the total repaid can be high relative to the capital received. Venture debt has a set schedule, often interest-only, with minimal dilution through warrants. Flow Capital provides venture debt.
| Bank Debt | Venture Capital | Revenue-Based Financing | Venture Debt (Flow Capital) | |
|---|---|---|---|---|
| Best for | Companies that are already profitable | Early-stage companies that need investors' help building their team | Companies with predictable revenue and strong cash flow | Growing companies with a strong management team |
| Profitability required | Yes | No | No | No |
| Dilution | None | Significant, with every round | Typically none; some lenders include a small warrant or success fee | Minimal. Warrants typically represent 1-3% of total equity |
| Personal guarantees | Usually required | No | Varies by lender | No |
| Covenants and control | Strict covenants | No covenants, but investors usually take board seats | Light; no board seats | Light; no board seats |
| Repayment | Fixed payments | None | A fixed percentage of monthly revenueScheduled payments; Flow Capital loans are interest-only | |
| Cost of capital | Lowest | Highest over time, paid in ownership | Can be high relative to the capital received, depending on the repayment cap | Between bank debt and venture capital |
Should my company use bank debt, venture capital, or venture debt?
It depends on your stage. Companies that are already profitable are usually best served by bank debt. Companies that still need to build their management team, or are too early to show fast revenue growth, usually raise venture capital. Companies that are not yet profitable but have an experienced team, fast-growing revenue, and equity valuations that undervalue the business are often a strong fit for venture debt.
Can a company get venture debt before it is profitable?
Yes. Venture debt is designed for growing companies that are not yet profitable. Lenders look at revenue growth, the strength of the management team, and the path to profitability rather than requiring current profits.
How much dilution does venture debt cause?
Very little. Venture lenders typically take warrants representing about 1–3% of total equity, so founders keep 97–99% of their company. A venture capital round usually dilutes founders far more.
What is the difference between venture debt and revenue-based financing?
Venture debt is a term loan with scheduled payments, often interest-only for part or all of the term. Revenue-based financing is repaid as a fixed percentage of monthly revenue until a pre-agreed cap is reached, which can make the total cost high relative to the capital received.
How much venture debt does Flow Capital provide?
Flow Capital provides interest-only growth capital of $1-15 million to high-growth technology companies in the United States, Canada and the United Kingdom.
