Venture debt is reaching smaller startups. What founders should check before signing

In Southeast Asia, venture debt is becoming a more accessible option for smaller startups. In the first half of 2026, the region saw 23 deals worth US$1.36 billion, up from 17 a year earlier, according to the H1 2026 Funding Report. Average deal sizes have also shrunk, from about US$99 million to US$59 million. This increased access to debt means lenders are now targeting smaller companies that may not have qualified for larger deals in the past.

Before signing any venture debt, founders should consider whether the loan aligns with their business plan. Debt works best when it bridges a specific goal, such as a revenue milestone or a higher valuation at the next round. However, it can be a poor substitute for a business model that isn't working. Founders should be wary of relying on debt as a fallback plan if their next equity round doesn't materialize.

When evaluating the total cost of a loan, it's crucial to look beyond the headline interest rate. Fees and charges can significantly increase the overall cost. For example, a loan with an 11% interest rate, three% upfront fee, and generous warrant coverage may be more expensive than a loan with a 13% rate and no such additional costs. Founders must carefully calculate the total cost before comparing offers.

The repayment schedule is another critical factor to consider. Most venture loans start with an interest-only period, followed by monthly repayments of principal. If principal repayments begin before the capital has produced results, the loan can drain cash at the worst possible time. Founders should model their cash position month by month, including repayment amounts, to ensure the loan doesn't jeopardize their financial runway.

Understanding covenant requirements is also essential. These conditions, which may include minimum cash balances, revenue targets, and limits on further borrowing, can significantly impact a company's financial flexibility. Founders should pay particular attention to the material adverse change clause, as a broadly defined clause could trigger loan repayment for reasons unrelated to the company's performance. Negotiating to limit this clause to business-specific changes can help mitigate risk.

Many venture loans are secured, meaning they are backed by company assets, including intellectual property, bank accounts, and receivables. In some cases, founders may also be required to provide personal guarantees, turning personal financial issues into business liabilities. Negotiating to cap or time-limit personal guarantees, even at the expense of a slightly higher interest rate, is often worth considering to protect personal assets.

Currency fluctuations can also affect the cost of a venture loan. Most debt in the region is denominated in US or Singapore dollars, which can be problematic if a company's revenues are in local currencies like rupiah or pesos. Founders should consider the potential impact of currency movements on their repayment obligations and factor this into their financial planning.

Early involvement of the board is crucial when taking on debt. Existing investors may need to approve the loan, and lenders may require existing shareholder loans or convertible notes to rank behind the new debt. Delays in addressing these issues can disrupt the closing process and strain relationships with current investors.

From a lender's perspective, they evaluate the backing of the company, the remaining runway, spending discipline, and the management team's honesty and transparency. Founders who proactively address these concerns are more likely to secure favorable terms and be better prepared for potential issues.

Venture debt is a valuable tool for smaller startups, providing an alternative to dilutive equity or running out of cash. However, it comes with real consequences that founders must understand and manage carefully. By thoroughly reviewing the term sheet, seeking experienced legal counsel, and considering the potential risks and benefits, founders can make informed decisions about whether venture debt is the right solution for their company.