Debt: Fuel for Startup Growth or a Trap That Destroys Them?

In recent years, there has been a remarkable rise in financing through private debt, which has transformed from a small corner of the financial world into one of the fastest-growing investment tools among major institutions.

This phenomenon opens a new door for entrepreneurs to obtain capital away from banks and venture capital funds, but at the same time it carries risks that cannot be ignored.

From the 2008 Crisis to the 2025 Boom

The roots of the spread of private debt trace back to the global financial crisis of 2008, when banks tightened lending restrictions on small and medium-sized enterprises, prompting large investors – from pension funds, insurance companies, and sovereign wealth funds – to search for new returns in a low-interest-rate environment.

According to statistics, assets under management by private debt funds exceeded $1.5 trillion in 2024, and show no signs of slowing down. Most importantly, this sector has shown exceptional resilience during crises, from the pandemic to inflation, strengthening investor confidence in it as a stable long-term bet.

Different Rules of the Game

This shift means that private debt funds no longer operate on the margins but have become key players in financing growth. However, they differ radically from banks or venture capital funds in how they deal with companies.

A venture investor may tolerate some chaos for the sake of growth, while banks stick to specific terms and deal only on the basis of credit risk. Private debt funds, on the other hand, focus on organized deals, strict governance, and financial discipline.

And if you decide to turn to private debt, you must think like an institutional investor, not just an entrepreneur.

Private Debt Serves Companies

When used wisely, private debt can be an ideal financing tool for entrepreneurs. It does not dilute founders' ownership as equity capital increases do, and allows them to maintain full control of their companies.

In one case, a software company (SaaS) used debt financing to expand its business into new markets without giving up equity stakes, while another e-commerce company used financing to cover seasonal capital gaps. In both cases, debt was not a burden but a financial lever for calculated growth.

This type of financing is also characterized by flexibility compared to banks, as repayment schedules can be tailored to the nature of the business activity – such as seasonal timing for stores or product development stages for software companies. Here, debt becomes a tool that moves in harmony with the company's cash flows.

The Other Side of the Coin

But it should not be ignored that debt is a double-edged sword. Equity investors share risks, while lenders expect full repayment regardless of circumstances. In crises, they may be far less lenient than individual investors or venture capitalists.

The writer recalls another experience when his company faced a sudden regulatory obstacle that caused revenues to fall below the required minimum in the loan covenants.

Once those 'covenants' were breached, the company entered a state of technical default, draining efforts in negotiations with the lender instead of focusing on saving the business.

The writer concludes that the mistake was not in the debt itself, but in failing to negotiate terms that provide enough safety margin from the start.

How Should Entrepreneurs Act?

Before considering financing through private debt, experts advise founders to follow basic steps:

- Build early financial maturity: organize accounting, hire talent capable of preparing reports at the level of institutional investors.

- Understand the terms well: seek conditions that give the company breathing room in case of temporary setbacks.

- Direct debt toward predictable goals: finance studied expansions, not unguaranteed adventures.

- Control the level of borrowing: excessive debt can restrict the company's movement and make it unable to maneuver.

- Maintain continuous communication with lenders: investors do not like surprises, and transparency builds trust even in difficult times.

A Look to the Future

All indicators suggest that private debt will continue to expand, with more institutional capital being poured into this sector.

And the question is no longer whether this tool is good or bad, but: Are you ready for the level of discipline it imposes?

The writer says that turning to private debt forced his company to adopt early financial professionalism, build accurate forecasting systems, and adopt prudent governance that made performance stronger and more sustainable.

In the end, private debt can be seen not just as a source of financing, but as a school in discipline. Those who master its use can grow and maintain ownership, while those who mishandle it may find themselves in a trap with no way out.

Source: Entrepreneur

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