The ABCs of Startup Debt: 8 Essential Terms Simplified

Debt for startups is filled with ridiculous jargon.

So we made it simpler.

Here are the 8 most confusing terms in plain English👇

1) Principal

The amount of money the lender gives you as a loan.

If you get a $10 million loan, your principal is $10 million.

You owe the principal at the end of the term or maturity date.

2) Interest Rate

The lender's fee paid over time to use their money.

As rates rise in the economy, venture debt is more expensive.

Why?

If you can buy US T-Bills for 2%, venture debt may cost 10% given the risk.

But if T-Bills pay 4%, venture debt may cost 20%.

3) Maturity Date

Due date when you need to pay back the borrowed money plus the extra fee or interest.

4) Warrants

Special tickets the lender gets to buy part of your company in the future at a set price.

Warrants are equity so you will get diluted.

They exist because lending to startups is risky so some want upside.

But not all startup lenders require warrants.

5) Covenants

The rules you agree to follow when you take the loan.

Covenants tell you things you must do or can’t do.

“Covenant-lite” means you don’t have rules but the interest rate could be higher.

6) Collateral

Something valuable that you promise to give to the lender if you can't pay back the loan.

It's a way for the lender to protect themselves.

Collateral can be stuff like cash, inventory or a factory.

7) Default

What happens when you break the rules of the loan.

Example: You default if you don’t pay your interest on time.

Punishments include the lender taking your collateral or asking for their money back immediately.

8) Amortization

How you gradually pay off the loan principal over time.

Every loan payment covers some interest and some principal.

We recently launched a Debt Marketplace for startups to simplify this crazy process.

Today, we have dozens of lenders that give $1 - $200 million loans.

Apply here if you want to learn more: https://meow.co/venture-debt.