Which is cheaper: term loan or line of credit?

Term loans usually carry lower rates for fixed capex with amortization. Lines cost more when drawn but you pay only on use — best for working-capital swings. Compare all-in APR with fees, not headline rate.

What is venture debt?

Senior loans to VC-backed startups with warrants, interest-only periods, and growth covenants. Faster than equity, cheaper than dilution if milestones hit, but unforgiving on default.

What covenants matter most?

Liquidity minimums, revenue or ARR hurdles, debt-service coverage, and MAC clauses. Model headroom monthly — breaches trigger cash control.

When does debt beat equity?

When cash flows cover service, dilution cost exceeds interest, and milestones de-risk the next round. If runway is under 6 months with missed targets, equity or cuts come first.

Term Loan vs Line of Credit vs Venture Debt in 2026: Cost, Covenants, and When Each Wins

Head-to-Head

Facility	Best for	Cost signal	Risk
Term loan	Equipment, expansion	Fixed amortizing	Collateral + covenants
Line / revolver	Seasonal WC	Pay on use + fees	Clean-up + borrowing base
Venture debt	Extend runway to milestone	IO + warrants	Tight covenants, MAC

Pair with Venture Debt, Working Capital, Cash-Flow, and Going Concern.

Covenant Math to Model

DSCR, quick ratio, minimum cash, ARR growth.
Sensitivity: -10% revenue, +200bps rates.
Headroom report monthly in Month-End Close — see Bank Rec.

Link forecasts to FP&A Software discipline and Treasury.

Diligence Packet Lenders Want

24-month forecast, AR aging — see Collections — AP aging, debt schedule, contracts.
Cap table — see Cap Table — and board minutes.
Audit-ready tie-outs per Q1 Prep.

All-In Cost Comparison (Worked)

$1m facility, 3-year horizon:

Cost	Term loan 8% amortizing	Revolver (avg 50% drawn, prime+2%, 0.5% unused)	Venture debt $1m, 12% IO + 5% warrant coverage
Interest/fees paid	~$128k	~$95k	~$360k interest + warrant dilution
Flexibility	None — fixed schedule	Draw/repay freely	IO period then amortization
True cost driver	Rate	Utilization + unused fees	Warrants (often 1–3% of company at exit value)

The revolver looks cheapest only at 50% utilization — at 90% drawn it exceeds the term loan, and at 10% drawn the unused fee dominates. Model your actual draw pattern from the Cash Forecast, not the headline rate. Venture debt’s warrants routinely cost more than the interest at a successful exit — price them at your expected valuation, not zero.

Covenant Negotiation Points (Before Signing)

Equity cure rights: can investors inject cash to cure a breach? How many times, and does cured quarter count for trailing tests?
Covenant holidays: 1–2 quarters of relief post-close while integration or growth investments land — see Post-Merger.
MAC clause scope: narrow to payment default and insolvency events; broad MAC (“material adverse change” undefined) lets lenders re-underwrite at will.
Reporting burden: monthly vs quarterly compliance certificates, audit deadlines, and field-exam rights — calendar all into Month-End Close.
Warrant coverage and success fees (venture debt): negotiate coverage percentage, valuation cap methodology, and whether success fees trigger on M&A only or any exit.

Have counsel redline covenants alongside economics — founders negotiate rate and ignore covenants, then breach the part they didn’t read.

When Each Wins (Decision Rules)

Term loan: asset with 5+ year life, predictable cash flow, DSCR >1.5× through downside. Equipment, buildouts, acquisitions.
Revolver: seasonal or lumpy working capital, DSO-driven gaps (see Collections), clean-up achievable annually (lenders require periodic zero balances to prove it’s working capital, not permanent debt).
Venture debt: 12+ months cash post-draw, credible milestone within the IO period that unlocks the next round at higher valuation, covenants you can meet in the downside case — not just base case.
None of the above: under 6 months runway with missed targets — debt accelerates failure. Cut burn or raise equity first — see Burn/Runway and Going Concern.