Venture debt interest rates and costs

How the interest rate is built

The interest rate is only one part of the cost of growth debt. A borrower may also pay upfront fees, charges on undrawn commitments, final payments, legal expenses and prepayment costs. Warrants can add an equity cost.

Compare the complete cash and equity cost under the company’s expected use of the facility and realistic downside scenarios. A low headline margin can be expensive if little of the commitment is usable or the company repays early.

A floating rate combines a reference rate with the lender’s margin, subject to the agreement’s calculation rules. For sterling borrowing, a reference may be SONIA, administered by the Bank of England. For US dollar borrowing, it may be SOFR, published by the Federal Reserve Bank of New York. Other benchmarks are possible, including the prime rate in the US example below. Check the precise rate, observation period and calculation method in the agreement.

A fixed rate stays at an agreed percentage for the relevant period; a floating rate can change. CMS explains this distinction in its debt funding guide. Compare the cash payments and any early repayment charges under both rising and falling rate assumptions.

Reference rate margin and floor

Read these terms together:

A benchmark floor and a total-rate floor are different. With a benchmark floor, the calculation is the higher of the benchmark and its floor, plus the margin. With a total-rate floor, it is the higher of benchmark plus margin and the total-rate floor. Use the formula in your documents.

For example, with an illustrative 3% benchmark, 4% benchmark floor and 7% margin, the rate is 11%. These figures demonstrate the arithmetic; they are not a market quote.

Cash interest and PIK interest

Cash-pay interest leaves the business on scheduled payment dates. Payment-in-kind interest, or PIK, is added to the debt instead of being paid immediately. LexisNexis explains PIK and its contractual variations, including compounding and the option to switch between cash and PIK.

PIK preserves cash now but increases the amount owed later. If capitalised interest itself attracts interest, the balance compounds. Check when capitalisation happens, whether using PIK changes the rate and who controls the choice. Our guide to PIK and cash-pay interest explores the cash-flow implications.

Arrangement commitment and unused fees

Start with the upfront fee and the expenses payable at signing or closing. Foley Hoag’s venture debt guide, under “Debt service and fees”, describes upfront charges, lender expenses, monitoring fees and exit fees in US venture lending.

For your offer, record each fee’s calculation basis and payment date. Does the upfront fee apply to the full commitment or only the initial draw? Is it deducted from the cash advanced? Which legal and diligence expenses are reimbursable, and is there a cap?

If the facility charges an unused fee, establish which undrawn amounts attract it, when it starts and whether conditional tranches count. Do not infer the calculation from the label “commitment fee”; read the definition. See drawdowns and tranches for availability conditions and venture debt due diligence for the work involved before closing.

End fees and final payments

A final payment is a separate cost from periodic interest. Check its calculation basis and the events that make it payable. A fee described as “end of term” may still be due if the loan is repaid early; the Lexicon example below illustrates this.

Ask for the amount payable at scheduled maturity and at your likely refinancing or sale dates. Establish whether acceleration following default also triggers the payment. A fee paid later can still make a short borrowing period expensive.

Prepayment costs

Prepayment means repaying before the scheduled date. Cooley GO’s term-sheet checklist treats early repayment penalties and exit fees as separate questions, including whether fees are waived when refinancing with the same lender.

Request a complete repayment illustration: outstanding principal, accrued interest, prepayment premium, final payment and any other contractual amounts. If your documents include minimum-interest or make-whole provisions, include those too. Do not assume that paying a prepayment charge replaces the final fee.

Model an early equity-funded repayment, a sale and a refinancing at several dates. Our refinancing venture debt guide covers the wider process.

Warrants and equity participation

A warrant gives its holder the right to acquire shares on agreed terms. It can provide the lender with equity upside alongside interest and fees.

Check the share class, exercise price, number of shares, expiry and treatment on a sale or listing. Cooley’s warrant checklist also asks whether the share calculation uses the amount drawn or the whole available facility.

Warrant coverage expressed as a percentage of a loan is not automatically the same percentage ownership of the company. Model the resulting shares and dilution under plausible outcomes. Keep this separate from contractual cash payments; adding an arbitrary percentage to the interest rate does not establish the warrant’s value. See warrants and equity kickers.

A disclosed financing example

Lexicon Pharmaceuticals’ May 2026 financing announcement described a Hercules facility of up to $100m, with $55m funded at closing to refinance existing borrowing. Additional drawings were conditional.

Its Form 10-Q, Note 6, filed on 7 May 2026 disclosed:

This is one US biopharmaceutical transaction, shown as disclosed at inception. It is not a current market average or a quote for another borrower. It demonstrates why the headline rate alone cannot describe the full cost. Undiluted’s coverage of the Lexicon facility provides the deal context.

Commitment and usable capital

A headline commitment is not necessarily cash the company can spend. Separate amounts available at closing from later tranches dependent on milestones or lender approval. Record upfront deductions, existing debt to be repaid and any required minimum cash balance.

For the operating model, distinguish cash received from cash available for spending. Keep minimum cash requirements as a separate restriction so that you do not accidentally count them as a fee or subtract the same reserve twice.

A simple illustrative example

Assume a fictional company borrows £3m for exactly one year. The benchmark is an illustrative 4% and the margin is 7%, unchanged throughout the year. There is no floor affecting the calculation.

The full principal remains outstanding for the year. A 2% arrangement fee is deducted at the start. All interest, principal and a 4% final payment are paid at the end of the year. There are no other fees, warrants, PIK, compounding or repayments during the year. These simplifying assumptions are not proposed market terms.

The company receives £2.94m at the start and pays £3.45m at the end. The £510,000 cost equals 17% of the face amount, but the effective one-year cash cost on net proceeds is £3.45m ÷ £2.94m − 1 = approximately 17.35%.

That calculation is specific to these two cash-flow dates. It is not a statutory APR disclosure or a market rate. Monthly interest payments, amortisation or earlier repayment would require a new calculation using the actual dates and amounts. Our guide to venture debt repayment structures explains how repayment timing changes the cash profile.

How to compare two offers

Build a monthly cash-flow model for each facility using the same operating assumptions. Include:

• Cash received at each draw, net of upfront deductions.
• Benchmark assumptions, floors and any margin changes.
• Cash interest, PIK and principal repayments on the correct balances.
• Upfront, unused, monitoring and final fees.
• Minimum cash requirements and conditions for later drawings.
• Prepayment charges at likely sale or refinancing dates.
• A separate warrant dilution analysis.

Run the expected case, delayed growth, a missed tranche and early repayment. Compare minimum available cash, total interest and fees, outstanding debt and potential equity dilution. Use our term-sheet comparison guide to assess these alongside covenants and security.

An IRR calculation using dated cash flows can help compare financing costs. It cannot capture every operational restriction or tell you whether the repayment schedule is affordable.

What determines the price

Company stage and revenue maturity can affect a lender’s assessment of risk. HSBC Innovation Banking’s discussion of venture debt costs contrasts earlier-stage borrowers with more established revenue-generating companies. Its discussion is framed around the UK market in 2025; treat it as context rather than a current pricing survey.

Obtain comparable offers for your company and ask what remains subject to diligence, credit approval or documentation. Compare the price with the accompanying availability, covenants, security and equity rights. A quoted percentage on its own is insufficient.

Questions to ask before signing

• What balance attracts interest, and from which date?
• Does the floor apply to the benchmark or the total rate?
• Which fees apply to the commitment, drawn amount or undrawn amount?
• What is payable on maturity, refinancing, sale or default?
• Can interest be added to principal, and does it compound?
• What does early repayment cost at each likely date?
• How are warrant shares and potential dilution calculated?
• How much cash is definitely available for spending after conditions and deductions?

Where to go next

• Growth and venture debt term sheets explained puts pricing alongside covenants, security and the other terms of a facility.
• How to compare venture debt term sheets provides a framework for comparing competing offers across cost, availability and restrictions.
• PIK and cash-pay interest explains how paying or capitalising interest changes cash flow and the balance owed.
• Warrants and equity kickers in growth lending explains lender equity rights, warrant coverage and potential dilution.
• Venture debt repayment structures compares interest-only periods, amortisation and maturity payments.