How much growth debt can a company raise?
Growth debt is sized using different combinations of equity, cash burn, revenue, EBITDA, company value and repayment capacity. The safe amount may be below the lender’s offer.
In brief
- There is no universal venture debt or growth credit sizing formula; lenders combine different measures according to stage and mandate.
- The responsible amount is the lowest of the capital the plan needs, the debt the downside can carry and the amount a lender will commit.
- Equity-round percentages, ARR multiples, EBITDA leverage and enterprise value are sense checks—not automatic entitlements.
- Facility structure changes capacity: committed tranches, repayment timing and covenant headroom can matter more than the headline amount.
In this guide
- The main sizing approaches
- Start with the use of proceeds
- Venture debt sizing: equity, burn and milestones
- Revenue and ARR sizing
- EBITDA, leverage and debt service
- Enterprise value and loan-to-value
- Assets and specialist facilities
- The downside capacity test
- An illustrative sizing example
- How structure changes capacity
- The lender’s own limits
- A borrower sizing checklist
- The bottom line
- Where to go next
A company can raise only as much growth debt as a lender will approve, but that is not necessarily the amount it should borrow. Responsible sizing is the lowest of three numbers: the capital the plan genuinely needs, the amount the company can carry through a realistic downside, and the amount a lender is willing to commit.
There is no universal venture debt or growth credit formula. Lenders may use an equity round, cash burn, recurring revenue, EBITDA, company value, assets and repayment capacity in different combinations. The weighting changes with the company’s stage and the lender’s mandate.
The main sizing approaches
| Approach | Most relevant when | What it tests | Main limitation |
|---|---|---|---|
| Equity round and liquidity | Venture-backed company shortly after a professional equity raise. | Whether debt is proportionate to fresh equity, runway and investor support. | An equity round validates value but does not itself repay the loan. |
| Cash burn and milestone need | Loss-making company using debt to extend runway or reach a defined milestone. | How many months the loan adds and whether cash lasts through delay. | A larger loan increases future payments and may not create equal net runway. |
| ARR or revenue | Subscription or recurring-revenue company with strong visibility. | Scale and quality of recurring income relative to the facility. | Headline revenue can conceal churn, low margin or customer concentration. |
| EBITDA and cash flow | Later-stage or profitable company. | Leverage, interest coverage and ability to service principal from operations. | EBITDA is not cash and can be adjusted differently. |
| Enterprise value | Company with credible market value or strategic exit options. | Debt relative to the value of the whole operating business. | Company value is uncertain and can fall sharply in a downside. |
| Asset base | Company with receivables, equipment, inventory or other financeable assets. | Recoverable collateral and borrowing capacity against eligible assets. | Asset eligibility and value can change, reducing availability. |
Start with the use of proceeds
The first number should come from the plan, not a lender’s maximum. Define the activity, timing and complete cash requirement. Include transaction costs, working capital, contingency and any cash already committed.
If a company needs £3 million to complete a product milestone, a £10 million facility may create more risk than value. Drawing excess cash incurs interest and may add fees, security and restrictions. A larger undrawn commitment can be useful, but only if availability lasts and later drawings are genuinely accessible.
Separate the total facility from the initial draw. A tranche is a portion made available separately. Later tranches can match the funding to evidence, but conditions based on revenue, equity or lender discretion may make them unavailable when the company most needs cash.
Venture debt sizing: equity, burn and milestones
For an early or expansion-stage company, present earnings may not support a conventional leverage calculation. Venture debt lenders commonly examine the recent equity round, investor quality, cash balance, monthly burn and the milestone funded by the combined capital.
Some market commentary expresses venture debt as a percentage of the recent equity round. That can be a useful initial sense check, not a standard entitlement. The same equity round can support very different debt amounts depending on revenue, burn, stage, investor capacity, company value, repayment timing and market conditions.
Cash burn is the net cash used each month. A simple gross-runway calculation divides available cash by burn, but debt sizing needs a monthly model. Interest, fees, principal, growth spending and changes in burn make the cash profile uneven.
The lender may ask how many months the debt adds before and after principal starts. If a £4 million draw adds eight months initially but repayments reduce that to four months before the next milestone, the useful extension is four months, not eight.
A future equity raise can form part of repayment, but its size and timing should be realistic. An uncommitted round at an optimistic valuation should not justify a larger loan by itself.
Revenue and ARR sizing
Later-stage growth lenders may compare debt with annual revenue or annual recurring revenue, usually called ARR. ARR is the annualised value of recurring subscription revenue. Definitions vary, so lenders reconcile it to contracts, billing and accounts.
A revenue multiple is not meaningful without quality. A lender may adjust for customer churn, concentration, implementation revenue, low-margin pass-through sales, cancellations, discounts and contracts that can be terminated easily.
Two companies with £20 million of ARR may support different facilities. One has high retention, strong gross margin and diversified customers. The other depends on two customers and replaces much of its revenue every year. The second company’s headline ARR gives less repayment confidence.
Do not present an ARR multiple as a market rule. It is one underwriting tool whose output is constrained by liquidity, repayment and structure.
EBITDA, leverage and debt service
For a profitable or near-profitable company, lenders may size debt using EBITDA and cash flow. EBITDA is earnings before interest, tax, depreciation and amortisation. Leverage commonly compares debt with EBITDA.
A lender may also calculate interest coverage or debt service coverage: how much earnings or cash is available relative to interest and principal due. The exact definition is negotiated and may include adjustments.
Borrowers should rebuild the calculation from cash. Subtract tax, working capital needs, maintenance capital spending and other unavoidable uses. Add the proposed loan payments on their actual dates. The company must fund obligations with cash, not an adjusted earnings label.
Later-stage direct lending research sometimes reports leverage ranges, but those observations reflect particular markets and profitable borrowers. They should not be transferred mechanically to loss-making growth companies.
Enterprise value and loan-to-value
Enterprise value is the estimated value of the operating business before allowing for its cash and debt. A lender may compare the facility with enterprise value, sometimes called loan-to-value.
The estimate may use a recent equity valuation, comparable companies, transactions or a cash-flow model. Each can change when markets, growth or margins weaken.
Enterprise value is therefore usually a supporting or secondary measure, not permission to ignore repayment. If a growth company fails to execute, the value available in a sale may be far below the last funding-round valuation.
Assets and specialist facilities
Receivables, inventory, equipment or other assets may support a separate borrowing base. A borrowing base is the value of eligible assets multiplied by agreed advance rates.
For example, a lender might finance only eligible invoices and exclude overdue, disputed or concentrated receivables. Availability rises and falls with the asset pool. This can match working capital better than a fixed growth term loan.
Specialist assets can have limited resale value. A high purchase price does not guarantee equal borrowing capacity.
The downside capacity test
The company should size debt against a monthly downside forecast through final maturity. At minimum, test slower revenue, weaker margin, higher costs, delayed collections, a missing tranche and an equity round six or twelve months late.
For each case, calculate the lowest cash balance, payment dates and covenant headroom. Covenant headroom is the gap between forecast performance and the minimum required by the loan.
A loan that works only in the base case is too large or wrongly structured. Management should retain enough cash and time to reduce costs, raise equity or negotiate with the lender before a breach becomes unavoidable.
An illustrative sizing example
Suppose a software company has £18 million of ARR, £12 million of cash and monthly burn of £750,000. It has just raised equity and wants debt to reach a milestone expected in twelve months. The figures below are illustrative, not market terms.
| Sizing lens | Illustrative result | Reason |
|---|---|---|
| Plan requirement | £4.0m | The budget needs £3.5m plus £0.5m contingency to complete the defined milestone. |
| Lender indication | Up to £6.0m | A lender’s preliminary view after considering equity, ARR, investors and company value. |
| Downside capacity | £3.0m | Above £3m, a six-month milestone delay leaves too little cash once repayments begin. |
| Responsible initial draw | £3.0m | The lowest binding amount; a later £1m tranche might be useful if committed on objective conditions. |
The £6 million headline is not the answer. The downside model limits the safe initial draw to £3 million. The company could negotiate a committed later tranche for the remaining plan need, extend the interest-only period or fund more of the milestone with equity.
How structure changes capacity
The same principal amount can create different risks depending on:
- when the company can draw it;
- whether undrawn amounts are committed or discretionary;
- the interest-only period and amortisation schedule;
- cash interest versus interest added to the balance;
- minimum cash and performance covenants;
- fees on committed and undrawn capital;
- early repayment charges; and
- whether additional debt is permitted later.
Amortisation is scheduled principal repayment. A longer interest-only period can improve near-term capacity but concentrates repayment later. Interest added to the balance protects current cash but increases the amount owed.
The lender’s own limits
Even when a company supports more debt, a lender may be constrained by its minimum or maximum ticket, sector exposure, geography, concentration, fund mandate or remaining capital. Another lender may reach a different answer without either calculation being wrong.
A multi-lender facility can add capacity but also complexity. Intercreditor arrangements determine how lenders rank and make decisions. The company should understand who controls amendments and enforcement.
A borrower sizing checklist
- Calculate the complete cash need for the defined plan.
- Build monthly base and downside cases through maturity.
- Reconcile ARR, revenue, EBITDA and cash rather than relying on one headline metric.
- Identify the primary and backup repayment sources.
- Model the next equity round with realistic timing and proceeds remaining after debt repayment.
- Separate committed availability from conditional tranches.
- Test the effect on covenants, lowest cash and the next financing.
- Compare a term loan with asset, receivables or revolving alternatives.
- Borrow the amount that improves the plan without removing the ability to survive a miss.
The bottom line
Venture debt sizing may place more weight on equity, burn, runway and milestones. Growth credit sizing may place more weight on recurring revenue, EBITDA, cash flow and enterprise value. Neither has one universal formula.
The responsible amount is constrained by purpose, downside capacity and lender appetite. The smallest constraint should drive the decision.
A larger offer is not free optionality. Size and structure the debt so that it creates useful time or productive investment while preserving the company’s ability to respond when the forecast is wrong.
Where to go next
- Is your company suitable for growth lending? shows the features lenders look for in a suitable borrower.
- How growth lenders assess companies sets out the underwriting questions behind a lender’s decision.
- Growth debt interest rates and costs builds a complete view of cash cost, fees and equity-linked value.
- Growth debt repayment structures compares interest-only periods, amortisation and maturity structures.
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