Venture Debt in Australia: What Startups Need to Know

Raising capital doesn’t always mean giving away more equity. If you’re scaling with revenue in sight (or already there), venture debt can help extend your runway, fund inventory, or smooth cash flow without diluting your cap table as much as a traditional equity round.

But venture debt is still debt. It comes with covenants, security interests and negotiation points that can impact your day-to-day operations and future funding rounds.

In this guide, we unpack how venture debt works in Australia, what lenders typically ask for, and the key legal steps to set up your business to borrow confidently and on fair terms.

What Is Venture Debt In Australia?

Venture debt is a form of business financing designed for startups and scaleups that have growth potential but don’t necessarily meet the asset or profitability profile of traditional bank loans. It’s usually provided by specialist lenders, funds, or sometimes banks with a venture arm.

Instead of relying only on hard assets, lenders assess your traction, unit economics, investor backing and growth plan. In exchange for taking on higher risk, the loan is priced with interest, fees and often an equity “sweetener” (for example, warrants or a small option to purchase shares in future).

Common use cases include:

• Extending runway between equity rounds
• Funding inventory, marketing or hiring tied to near-term growth
• Bridging to profitability or a major milestone (e.g. product launch)
• Refinancing existing short-term facilities on better terms

Lenders typically secure the facility with a charge over company assets. In Australia, that security is registered on the Personal Property Securities Register (PPSR), so lenders achieve priority if something goes wrong. If you’re new to the PPSR, it’s worth reading a plain-English overview of what the PPSR is and why registrations matter.

Venture Debt Vs Equity: Which Suits Your Growth Plan?

Neither approach is universally “better”. The right choice depends on your goals, stage, and risk tolerance. A quick comparison:

When Venture Debt Makes Sense

• You’re close to break-even or have reliable revenue visibility.
• Your growth initiatives have measurable payback periods (e.g. CAC/LTV that supports borrowing).
• You want to minimise dilution before a later, higher-valuation equity round.
• You have (or can put in place) the governance and reporting discipline lenders expect.

When Equity May Be Better

• You’re pre-revenue or still validating product-market fit.
• You need patient capital for longer-term R&D or uncertain payoffs.
• You can attract strategic investors who add more than money (distribution, expertise, credibility).
• You can’t (or don’t want to) meet covenants and reporting obligations tied to debt.

Some founders combine both. For example, close an equity round and add a venture debt facility to extend runway with limited extra dilution. If you’re exploring equity structures, you might compare a Convertible Note with a priced round supported by a Term Sheet. The financing mix is strategic-just make sure each instrument plays nicely together.

How Does A Venture Debt Deal Work? (Step-By-Step)

1) Prepare Your Data Room

Lenders will want to diligence your financials, pipeline, customer concentration, churn, compliance, and governance. Expect to provide historical and forecast P&L, balance sheet and cash flow models, key contracts, cap table, and board materials.

Make sure your corporate records (constitution, share register, board minutes) are up to date, and your key customer and supplier agreements are signed and accessible.

2) Indicative Term Sheet

You’ll usually start with a non-binding term sheet summarising the facility type, interest, fees, security, covenants, and any equity features (e.g. warrants). This is your best chance to negotiate headline levers before documents are drafted.

Clarify how covenants are tested (monthly, quarterly), what happens on a breach, and any restrictions on other debt or future raises. Alignment early saves friction later.

3) Legal Documentation

Once terms are agreed, the lender (or their lawyers) will issue draft documents. The core agreement sets out repayment terms, events of default, reporting and covenants. Where the facility is secured, you’ll also see security documents granting the lender rights over your assets.

In Australia, the lender will typically register that security on the PPSR. If they have a first-ranking General Security Agreement, it usually covers “all present and after-acquired property,” which is broad-so you need to understand how that affects future funding and operational flexibility.

4) Conditions Precedent And Drawdown

Before funds flow, you’ll satisfy “conditions precedent” (CPs). These are checklist items like signing board resolutions, providing insurance certificates, confirming no existing defaults, and proving key IP ownership. Your lawyer can help coordinate CPs so you’re ready to draw on time.

After completion, you’ll comply with ongoing obligations-reporting, covenant tests, consent processes for material changes, and keeping the lender’s PPSR registration valid. If your growth plan shifts, be proactive with your lender; relationships matter here.

What Legal Documents Do Lenders Commonly Require?

Expect some or all of the following (exact paperwork depends on lender and facility type):

• Facility Agreement: The main loan contract. Sets out amount, purpose, drawdown mechanics, interest, fees, prepayment, covenants, undertakings, reporting, events of default, and lender rights on default.
• General Security Agreement (GSA): Grants the lender a security interest over company assets. The lender will register this on the PPSR. If a GSA is on the table, review scope carefully and consider the impact on future financings. Here’s where a tailored General Security Agreement is crucial.
• IP Security/Specific Charges: Sometimes lenders want separate charges over patents, trade marks or domain names.
• Parent/Related-Entity Guarantees: If your group has multiple companies, cross-guarantees may be sought. Be clear about who is guaranteeing and the exposure created.
• Personal Guarantees: Some lenders ask founders to personally back the loan, especially earlier stage or smaller facilities. Understand the risks of personal guarantees before signing.
• Warrants/Equity Instruments: To enhance returns, lenders may take warrants (the right to purchase shares later at an exercise price). Align warrant terms with your cap table strategy.
• Board And Shareholder Approvals: You’ll document approvals via board minutes and, if required, shareholder resolutions.

For secured facilities, ensure the security is correctly perfected on the PPSR. If you are the lender (for example, intercompany lending), you’ll want to register a security interest promptly to preserve priority.

Key Legal Issues To Watch (And How To Manage Them)

1) Security Interests And Priority

Security and PPSR registrations determine who gets paid first if the worst happens. If you already have secured creditors (e.g. a bank with a working capital facility) or plan to raise more later, think about intercreditor arrangements and priority deeds early.

Negotiation points include whether the lender will accept a second-ranking security, any carve-outs for equipment financing or trade finance, and your ability to use receivables or IP in future transactions. A clear view of PPSR mechanics helps you avoid accidental subordination.

2) Covenants That Fit Your Business

Covenants are promises about how you’ll operate. Financial covenants (e.g. minimum cash, revenue targets, burn multiple) and affirmative/negative covenants (e.g. no additional debt, limits on acquisitions, restrictions on dividends) should be realistic and measurable.

Make sure definitions match how you run the business. For instance, “EBITDA” or “ARR” should be clearly defined. Build in cure periods, consent mechanisms, and reasonable thresholds for “material” changes so you’re not tripping defaults over normal course decisions.

3) Flexibility For Future Equity Rounds

Most growth businesses plan multiple raises. Ensure your venture debt leaves room for future equity, employee options and secondary facilities. Watch for restrictions on issuing new shares, granting additional security, or changing control. You’ll want clean pathways to close your next equity round under a Term Sheet without needing to rework debt at the last minute.

4) Warrants And Dilution

Warrants add an equity component to venture debt. Key terms include coverage (how many warrants), exercise price, expiry, anti-dilution and treatment on exit. Model the fully diluted impact alongside your option pool so you understand the real cost of capital.

5) Guarantees And Recourse

Personal or group guarantees increase lender comfort but raise your risk. If requested, cap your exposure, limit to specific defaults (not “all obligations”), and ensure release triggers (e.g. once leverage drops or a refinancing occurs). Revisit whether a bank guarantee or a smaller top-up facility could achieve the lender’s objectives with less founder risk.

6) Events Of Default And Remedies

These clauses determine what happens if things go off-plan. Aim for sensible grace periods, materiality thresholds, and opportunities to cure. Ensure minor covenant breaches don’t automatically escalate to acceleration and enforcement of security. Clarity here reduces stress in real-world bumps.

7) Closing Checklist And Perfection

Plan ahead for board approvals, signatures, insurance certificates, KYC and PPSR registrations. Accurate details are critical-typos in company names or ACNs can invalidate a PPSR registration. If you’re taking security yourself (for example, between related entities), build a process to register your security interest immediately after signing.

8) Equity-Like Alternatives

Sometimes, equity-linked debt (like a Convertible Note) is a better fit, especially if you want to defer valuation and keep covenants light. It’s still a legal instrument with its own risks (interest accrual, maturity/default, conversion mechanics), but it may preserve flexibility while you build traction.

How Should You Structure Your Company Before Borrowing?

Venture lenders prefer borrowing from a clean corporate vehicle with clear IP ownership, a well-documented cap table, and appropriate governance. Before approaching lenders, consider whether your current structure is fit for purpose.

• Separate Legal Entity: Most lenders expect a company borrower. If you’re still operating as a sole trader or partnership, consider moving to a company structure to ring-fence liability and cleanly issue options or warrants.
• IP Ownership: Ensure your key IP is owned by the borrower or an entity acceptable to the lender, and that assignments from founders, employees and contractors are documented.
• Group Simplification: If you have multiple entities, be ready to show where revenue, assets and liabilities sit. Lenders may require cross-guarantees or security from material subsidiaries.
• Board Governance: Adopt practical board processes and keep minutes. Many lenders request board approvals for the facility and certain consent actions.
• Security-Friendly Contracts: Review key customer and supplier contracts for clauses restricting assignment or security interests-these can complicate enforcement and may require consents.

If you’re formalising your structure for the first time, get your core corporate documents in order early (constitution, share register, option plan rules). Lenders notice when the foundations are solid.

Practical Tips For Negotiating Venture Debt

• Anchor On Use Of Funds: Tie the facility amount and tenor to initiatives with clear payback windows (e.g. inventory cycles, marketing with proven CAC). This helps justify terms and covenants.
• Model Scenarios: Run covenant headroom across base, downside and upside cases. Negotiate cushions that reflect real-world volatility.
• Match The Security To The Risk: If your business has strong receivables or inventory controls, consider whether specific security (instead of blanket “all-assets”) is workable.
• Align With Future Funding: Make sure negative covenants don’t block standard equity terms or employee equity plans. Bring your investor to the table if that helps alignment.
• Plan For Refinancing: Include prepayment flexibility and reasonable break costs, so you can refinance after hitting milestones.
• Perfect The Details: Names, ACNs, addresses and asset descriptions must be precise in security documents and PPSR filings. Administrative errors can create expensive problems later.

Essential Legal Hygiene Before And After Drawdown

The smoothest venture debt deals are built on tidy housekeeping. A short legal audit before you negotiate can save weeks.

• Contracts: Ensure key customer and supplier contracts are signed, assignable, and include standard protections for confidentiality and IP.
• IP: Confirm ownership of code, content and trade marks, and ensure employee and contractor IP assignments are signed and stored.
• Security Interests: Check for existing PPSR registrations against your company and clean up any outdated or erroneous filings.
• Board Approvals: Prepare draft resolutions for entering the facility and granting security.
• Insurance: Review coverage levels; lenders often require certain policies and endorsements.
• Reporting: Set up systems to deliver monthly financials, covenant tests, and KPI dashboards on time-reliability builds trust.

If you’re on the lending side (for example, internal group funding or supplier credit), consider whether a properly drafted General Security Agreement and timely PPSR registration will protect your priority.

Common Venture Debt Myths (And The Reality)

• “Venture debt is only for late-stage companies.” Not always. Early revenue-stage businesses with strong unit economics can be good candidates, especially for inventory or working capital lines.
• “Debt is cheaper than equity.” The headline cost can be lower, but factor in fees, warrants and the operational cost of covenants. Model the total cost of capital for your situation.
• “Security isn’t a big deal in Australia.” Security is central. Priority on insolvency hinges on correct PPSR registrations and documentation. Treat it as a first-class issue, not an afterthought.
• “Covenants are standard boilerplate.” They’re negotiable-and should be tailored to your business model. Definitions, thresholds and cure rights matter in practice.
• “Personal guarantees are unavoidable.” Many venture lenders focus on business assets and performance. If a guarantee is sought, explore alternatives (e.g. additional reporting, tighter covenants) or mitigations like caps and release triggers. If you are considering a guarantee, revisit the risks of personal guarantees.

Key Takeaways

• Venture debt can extend runway and fund growth with less dilution, but it comes with covenants, security and lender rights you need to understand.
• Expect a Facility Agreement, security documents and possible warrants; ensure any General Security Agreement and PPSR registrations are accurate and don’t block future funding.
• Negotiate covenants, definitions and cure rights to match how your business actually operates, and model headroom across realistic scenarios.
• Plan for future rounds by aligning debt terms with equity goals, including option pools, new issues and intercreditor priorities under your Term Sheet.
• Tidy legal hygiene-IP ownership, assignable contracts, board approvals and correct PPSR filings-reduces friction and protects priority.
• If you’re lending or borrowing against assets, understand PPSR and be ready to register a security interest without errors.

If you’d like a consultation on structuring, negotiating and documenting venture debt for your business, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.