What Is Entrepreneurial Debt? Types of Entrepreneurial Debt

You’ve probably heard the pitch a hundred times: “Give us 20% of your company, and we’ll give you the capital to grow.” 

Sounds simple, right? 

But here’s what keeps you up at night – that 20% could be worth millions down the road. Or it could mean losing control of the company you built from scratch.

That’s where entrepreneurial debt comes in. It’s borrowed capital that lets you fuel growth without signing away pieces of your business. You’re still figuring out if it’s the right move for you, but understanding how it works is the first step. Let’s break down what entrepreneurial debt actually means and how it stacks up against traditional equity financing.

What Is Entrepreneurial Debt?

Entrepreneurial debt is money you borrow to grow your business, with the understanding that you’ll pay it back over time, plus interest. Think of it like a mortgage for your company. You get the capital you need now, and you make regular payments until the loan is settled.

What makes this appealing is simple: you keep full ownership. According to data from the Canadian venture debt market, entrepreneurial debt reached C$881 million in 2024, representing a 99% increase over 2023. That surge tells you something – more business owners are choosing debt over dilution.

Here’s a real-world example. Say you run a SaaS company bringing in $50,000 monthly recurring revenue. You need $200,000 to hire developers and expand your product. With debt, you borrow that money, pay it back over three years with interest, and your ownership stake stays exactly where it was. No new partners at the table. No one questioning your decisions.

Entrepreneurial Debt vs Equity Financing

Let’s think about this for a second. When you take equity financing, you’re trading a slice of your company for cash. When you take on debt, you’re borrowing money you’ll need to pay back. Both get you funded, but they work in completely different ways.

With equity financing, investors buy a percentage of your business. That means they own part of your future profits. They also get a say in major decisions – sometimes a small voice, sometimes a loud one. The upside? You don’t owe monthly payments. The money is yours to use, and if the business fails, you don’t have to pay it back.

Debt works the opposite way. You borrow a set amount and agree to repay it with interest over a specific timeline. You keep 100% ownership, which means you call all the shots. But here’s the catch. You’re on the hook for those payments whether your business is booming or barely breaking even.

What this means for you depends on where your company stands right now. If you’ve got steady revenue and can handle monthly payments, debt lets you grow without giving up control. If you’re pre-revenue or in a high-risk phase, equity might make more sense because it shares the risk with investors. You’re not alone in weighing this. Plenty of founders wrestle with the same decision. The thing is, there’s no one-size-fits-all answer. It comes down to how much control you want and how confident you are in your cash flow.

How Does Entrepreneurial Debt Work?

Now that you understand what sets debt apart from equity, let’s walk through what actually happens when you pursue this type of funding.

The process starts with your application. You’ll need to show lenders your business plan, financial statements, and proof of existing equity funding if you’ve raised any. Most lenders want to see that you have some runway already and aren’t using debt as a last resort. They’re looking at your burn rate, revenue growth, and how much cash you have on hand.

Here’s how the timeline usually plays out. Online lenders can approve and fund you within one to two business days. Traditional bank loans take longer. Expect at least a week, sometimes up to 30 days. SBA-backed loans sit on the longer end, typically 60 to 90 days from application to funding. The speed depends on how complex your business is and how quickly you can provide documents.

Once approved, you’ll see terms that include your interest rate, repayment schedule, and any collateral requirements. Interest rates vary widely. Venture debt might run 8% to 15% annually, while traditional bank loans could go lower if you have strong financials. Some lenders want collateral like equipment or inventory. Others rely more on your venture capital backing as security.

The thing is, venture debt activity reached $283 million in Canada in Q1 2025 alone. That tells you lenders are actively funding startups who meet their criteria. You draw down the loan amount, use it to hit your growth targets, and make monthly payments until it’s repaid. Most loans run 24 to 48 months, giving you time to scale without immediate pressure.

7 Types of Entrepreneurial Debt

Not all debt works the same way. What you need depends on where your business is right now and what you’re trying to accomplish next.

Some options work best when you’ve already raised venture capital. Others make sense if you’re bootstrapped but have steady revenue. A few are designed for specific purchases like equipment or inventory. Each type comes with its own requirements, costs, and ideal timing.

Let’s break down the seven main types you’ll come across. Understanding these helps you match your situation to the right funding source instead of forcing a fit that doesn’t work.

Venture Debt

This is specialized financing designed specifically for venture-backed startups that need extra runway. Think of it as the middle ground between burning through your equity round too fast and diluting yourself with another fundraise.

Here’s how it works. You typically get 25-35% of whatever your most recent equity raise was. Just closed a $5 million Series A? You might qualify for $1.25 to $1.75 million in venture debt. The thing is, you’re not putting up traditional collateral like real estate or equipment.

The global venture debt market is projected to reach $42.97 billion in 2025, which tells you this isn’t some niche option anymore. It’s mainstream.

Here’s when this works. You’ve got 12 months of runway left, but you’re six months away from hitting a major milestone that’ll boost your valuation. Instead of raising equity now at a lower price, you take venture debt to bridge that gap. You hit the milestone, then raise equity at better terms.

Term Loans

These are your traditional bank loans. You borrow a lump sum, pay it back on a fixed schedule over time, plus interest. Pretty straightforward.

What “fixed schedule” actually means is this: let’s say you get a $100,000 loan with a three-year term. You’ll make the same payment every month for 36 months until it’s paid off. No surprises, no flexibility. Just consistent payments that you can budget for.

The catch is banks want proof you can handle it. We’re talking about credit scores above 680, at least two years of business history, and steady revenue that shows you can cover the payments. Traditional business loans like these are best suited for established businesses with predictable cash flow.

Here’s a practical example. You run a profitable SaaS company pulling in $50,000 monthly. You want to hire three developers to build a new feature that’ll take eight months. A term loan gives you the upfront capital, and your existing revenue covers the monthly payments while your team builds.

Business Lines of Credit

This works like a credit card for your business. You get approved for a certain limit, say $50,000, but you only draw what you need when you need it. And you only pay interest on what you actually use.

That’s the key difference from a term loan. With a term loan, you get the full amount upfront whether you need it all right now or not. With a line of credit, you might draw $10,000 in March, pay it back in April, then draw $15,000 in June. It’s revolving credit.

This is perfect for working capital and short-term expenses. Your biggest client pays net-60, but you need to make payroll every two weeks? Draw from your line to cover payroll, then repay it when the client payment hits.

Here’s what that looks like in practice. You’re an e-commerce brand that needs to stock up on inventory before Black Friday. You draw $30,000 in October to buy products, sell them in November, and pay back the $30,000 plus interest by December. Your credit line resets, ready for the next time you need it.

Equipment Financing

Here’s something practical: you need a $50,000 piece of machinery but don’t want to drain your cash reserves. Equipment financing lets you buy what you need while the equipment itself acts as collateral.

This setup makes qualifying easier. The lender knows if you default, they can repossess the equipment and recover their money. That’s why you’ll often see better rates and terms compared to unsecured loans.

This works well if you’re buying tangible assets: manufacturing equipment, delivery vehicles, restaurant kitchen gear, or office technology. You spread the cost over time while using the equipment to generate revenue.

The practical advantage? You’re not tying up working capital in one large purchase. You pay as the equipment helps you earn. Plus, since the loan is tied to the asset’s value, lenders focus less on your credit history and more on whether the equipment makes financial sense.

Revenue-Based Financing

Let’s say your monthly revenue fluctuates between $30,000 and $80,000. Fixed loan payments can crush you during slow months. That’s where revenue-based financing adjusts to your reality.

You borrow a lump sum and repay a fixed percentage of your monthly revenue until you’ve paid back the agreed amount. If you bring in $50,000 one month at a 10% repayment rate, you pay $5,000. Next month you earn $80,000? You pay $8,000.

This flexibility works for businesses with recurring revenue but inconsistent cash flow; SaaS companies, subscription services, or seasonal businesses. When revenue dips, your payment dips. When business booms, you pay more and clear the debt faster.

The catch? You’re typically paying back more than you borrowed through that percentage structure. But you keep your equity and avoid the pressure of fixed payments during lean periods.

SBA Loans

Small Business Administration loans come with terms that make traditional lenders jealous. We’re talking lower down payments, longer repayment periods, and reduced collateral requirements.

The SBA doesn’t actually lend you money. They guarantee a portion of loans made by approved banks, which means those banks take less risk and can offer you better deals. You might secure funding at 6-8% interest when a regular bank would charge 10-12%.

Here’s the trade-off: better terms but longer processing. SBA loans can take weeks or months to approve because of the paperwork and requirements involved. You’ll need solid credit, a detailed business plan, and patience.

These loans work best if you’re established, planning significant growth, and can wait for approval. Startups with minimal history struggle to qualify, but businesses showing consistent revenue and clear expansion plans often find SBA loans worth the wait.

Convertible Notes

You’ve just launched your startup and need $100,000 to reach your next milestone, but you’re not ready to set a valuation yet. Convertible notes solve this timing problem.

This is technically debt. You’re borrowing money with interest. But instead of paying cash back, the loan converts to equity when you raise your next funding round. The investor who gave you that $100,000 gets shares at a discount or with favorable terms.

Founders use this strategically between funding rounds. Let’s say you raised seed money six months ago but need extra cash before your Series A. A convertible note bridges that gap without reopening valuation negotiations or diluting equity immediately.

The note typically includes a valuation cap or discount rate that rewards early investors for taking on more risk. When your Series A happens at a $5 million valuation, note holders might convert at a $4 million cap, getting more shares for their early bet on you.

When Should Entrepreneurs Use Debt Financing?

Debt works best when you’ve got predictable revenue coming in. If your business has been around for at least a year and you’re seeing consistent monthly income, you’re in a good position to handle regular payments. That’s the foundation lenders look for.

Think about equipment financing when you need physical assets that’ll generate revenue. Let’s say you run a coffee shop and need a new espresso machine. The machine pays for itself through increased sales while you pay off the loan.

Revenue-based financing fits perfectly when you’re growing fast but don’t have collateral. Your sales history becomes your qualification. Lines of credit make sense for managing cash flow gaps – like when you need to pay suppliers before customer payments arrive.

Before taking on any form of debt, set up a proper credit monitoring system. It helps you track your credit score, catch reporting errors early, and maintain lender confidence for future financing rounds.

Here’s when debt doesn’t fit: you’re pre-revenue, burning through cash, or testing an unproven concept. Those scenarios call for equity because you can’t afford mandatory payments yet.

The self-assessment is simple. Can you afford monthly payments even during slower months? Do you have assets or revenue to qualify? Will the borrowed money generate returns that cover the interest cost? If you answered yes to all three, debt financing might work for you.

Advantages of Entrepreneurial Debt

Keeping full ownership means you call every shot. No investor meetings to justify decisions. No one questioning your expansion plans. You build value that’s entirely yours to sell or pass down someday.

The tax benefit is real money back in your pocket. Interest payments are tax-deductible, which lowers your taxable income. If you’re paying $1,000 monthly in interest and you’re in a 25% tax bracket, you’re effectively saving $250 per month.

You’ll know exactly what you owe and when. A $50,000 term loan at 8% for five years means predictable monthly payments you can budget around. Compare that to equity investors who might expect 10x returns with no clear timeline.

Each on-time payment builds your business credit score. That seemingly boring benefit becomes powerful later. Better credit means lower interest rates on future borrowing, higher credit limits, and better terms with suppliers who check your credit.

The relationship with your lender ends when you make the final payment. Unlike equity investors who remain involved indefinitely, debt financing has a finish line. You borrow, you pay it back with interest, you’re done. That clean exit appeals to founders who value independence.

Plus, you can borrow again once you’ve paid off a loan. Banks love repeat borrowers with solid repayment histories. Your second or third loan comes easier than your first.

Disadvantages of Entrepreneurial Debt

Payments don’t care about your bad months. You owe that money whether you landed a huge client or lost your biggest account. The loan doesn’t pause when your revenue drops 40% or when unexpected expenses hit.

Interest costs eat into your profit margin. That $100,000 loan at 10% interest costs you $10,000 in year one alone. Over five years, you might pay $25,000 or more in interest depending on the structure. That money could’ve hired someone or funded marketing instead.

Collateral puts your assets on the line. When you pledge your equipment, inventory, or property, you risk losing them if you can’t pay. Personal guarantees are even scarier – your house or personal savings become fair game if the business fails.

Default damages more than just your credit score. Late payments get reported and tank your score, making future borrowing expensive or impossible. But it goes further. Lenders can sue you, seize assets, or force bankruptcy. If you signed a personal guarantee, they can come after your personal accounts and property.

The stress of mandatory payments weighs on you mentally. Equity investors share your risk – if things go south, they lose their investment. Debt holders don’t care about your struggles. They want their money on schedule, which creates constant pressure that affects decision-making.

High debt loads limit your flexibility. That exciting opportunity to pivot your business model? Hard to pursue when you’re locked into payments for equipment that no longer fits your new direction.

How To Qualify For Entrepreneurial Debt

Your credit score matters most. Most lenders want at least 680 for favorable terms, though some SBA loans accept scores around 640. Anything below that and you’re either paying premium interest rates or getting rejected. Check your score before applying and fix any errors you find.

Time in business opens doors. Most lenders prefer at least two years of operating history. Newer businesses can still qualify for certain products like venture debt or revenue-based financing, but your options expand significantly after year two.

Revenue history proves you can pay them back. Lenders typically want to see consistent monthly revenue, not sporadic big wins. They’ll request bank statements showing regular deposits. For revenue-based financing, many lenders want at least $10,000 to $20,000 in monthly recurring revenue.

Your business plan shows you’re not winging it. A solid plan includes realistic financial projections, clear use of funds, and how the borrowed money generates returns. Skip the 40-page document. A concise 10-15 page plan with realistic numbers works better.

Collateral improves your chances and lowers your rate. Equipment, inventory, real estate, or even invoices can secure loans. No collateral? You’ll lean toward unsecured options like lines of credit or revenue-based financing, but expect higher interest rates.

Lower your debt-to-income ratio before applying. Lenders calculate how much debt you’re already carrying versus your income. Pay down existing debts when possible. The less leveraged you are, the more likely you’ll qualify.