Due Diligence for Private Credit: A VC-Backed Company’s Guide

Why Debt Matters for VC-Backed Companies

Equity has been the growth engine for startups, but debt is increasingly a strategic complement. Importantly, the value of debt depends on a company’s business model:

• SaaS companies often use recurring revenue lines or venture debt tied to ARR.

• Consumer goods companies benefit from AR/working capital lines.

• Fintechs often rely on warehouse or forward-flow facilities.

• Life sciences and hardware firms frequently need equipment financing.

Debt can help companies:

• Extend runway between equity rounds.

• Fund acquisitions or product expansion without diluting ownership.

• Smooth working capital cycles in subscription, consumer, or hardware businesses.

• Preserve flexibility while giving investors more time to create value before the next priced round.

Imagine you’re a Series C SaaS CEO with 16 months of runway. You know raising another equity round today will be dilutive. By layering in a recurring revenue facility, you can unlock capital tied to your ARR, keep scaling, and hit stronger milestones before your next raise.

Real-World Facilities for VC-Backed Companies

• Early and Late-Stage Venture Debt – Equity-linked structures with warrants; often used after Series A–C to extend runway.

  Case Example: An early-growth subscription business raised a venture-debt term loan post-Series B to fund its transition into subscriptions—enabling inventory investment and marketing spend.

  VC Lens: Boards should evaluate warrant coverage and covenant packages carefully to ensure alignment with equity investors.

  
  

• Recurring Revenue Facilities – SaaS-tailored lines sized to ARR/MRR rather than EBITDA.

  Case Example: A SaaS company with $30M ARR tapped a recurring revenue facility sized to MRR, allowing it to fund customer acquisition against predictable subscription revenues.

  VC Lens: This structure works best when retention and churn metrics are strong—VCs should confirm forecasts are realistic and tied to contracted ARR.

  
  

• A/R Working Capital Lines of Credit – Collateralized by receivables; common in enterprise SaaS, hardware, and consumer goods.

  Case Example: A consumer brand used an AR-based credit line to smooth seasonal receivable swings tied to wholesale accounts.

  VC Lens: Investors should assess customer concentration—overreliance on one large account can create lender pushback.

  
  

• Warehouse Lines of Credit for Fintech Lenders – Enables fintechs to scale loan origination without over-relying on equity.

  Case Example: A fintech lender secured a warehouse line of credit to scale its loan portfolio, enabling rapid origination growth while preserving equity for technology investments.

  VC Lens: Boards should demand robust loan-level analytics and stress-testing, since warehouse leverage amplifies risk if underwriting weakens.

  
  

• Equipment Financing – Capital for hardware, manufacturing, or lab-intensive businesses.

  Case Example: A life sciences startup raised an equipment financing facility to fund lab buildouts, preserving equity for R&D.

  VC Lens: Ensure equipment liens don’t conflict with senior venture debt covenants.

  
  

• Mezzanine Facilities – Subordinated debt, often used when companies want non-dilutive growth capital beyond senior debt capacity.

  Case Example: A late-stage consumer internet company layered mezzanine debt beneath its senior lender to fund expansion without equity dilution.

  VC Lens: While mezzanine avoids dilution, investors should weigh the higher coupon and potential cash flow strain.

  
  

• Acquisition Financing – Growth credit or mezzanine tranches to fund tuck-ins or platform M&A.

  Case Example: A healthcare IT company financed a tuck-in acquisition with growth credit, consolidating market position before its next equity round.

  VC Lens: Lenders will test integration assumptions—boards should validate that acquisition synergies are credible.

  
  

• NAV Facility for a Late-Stage VC Firm

  Case Example: A late-stage VC fund raised a NAV facility backed by portfolio holdings. The capital supported follow-ons and LP distributions while exits were delayed.

  VC Lens: LPs often welcome NAV facilities, but boards should ensure borrowing doesn’t over-lever aging portfolios.

  
  

• Forward Flow / Securitization for Fintech

  Case Example: A fintech originated SME loans via a forward-flow SPV. The structure provided 100% funding of new loans off balance sheet, enabling significant origination growth while aligning incentives to maintain credit quality.

  VC Lens: Investors should ensure the fintech remains incentivized to maintain underwriting discipline, especially when loans are sold immediately.

The Role of Due Diligence

For companies raising specialty facilities like recurring revenue lines or mezzanine debt, preparation matters even more—these lenders dig deep into KPIs, unit economics, and downside protection.

Think of diligence not as “passing a test,” but as “showing your homework.” The more transparent you are, the more leverage you’ll have in negotiations.

5-Step Readiness Checklist (With Facility-Specific Spin)

1. Financials & Risk

   1. Reconcile ARR/MRR data (for SaaS) or AR agings (for working capital lines).

   2. Run downside scenarios and covenant stress tests.

2. Contracts & Compliance

   1. Clean customer contracts are vital for SaaS recurring revenue facilities.

   2. Companies with existing credit should also evaluate refinance costs before pursuing new debt.

3. Investor Alignment

   1. Secure VC consent letters or explicit board approvals early.

   2. VC Lens: Alignment between management and the board is critical; lenders often ask for evidence of investor support.

4. Market Narrative & Financing Story

   1. Lenders want to understand the durability of demand (critical for warehouse facilities).

   2. Position the growth story and explain why debt complements equity.

5. Capital Objectives

   1. Tie proceeds directly to strategy (runway extension, M&A, equipment expansion).

   2. VC Lens: VCs should test whether debt is being used as true growth capital versus just plugging burn.

Type-Specific Diligence Lenses

• Venture Debt (early & late stage): VC support letters, runway analysis, board approvals.

• Recurring Revenue Credit Lines: SaaS retention data, churn cohorts, ARR bridges.

• A/R Working Capital Lines: AR/AP agings, concentration analysis, lien releases.

• Warehouse Lines (Fintech): Loan tape detail, portfolio performance, capital stack waterfalls.

• Equipment Financing: Fixed asset registers, purchase contracts, depreciation schedules.

• Mezzanine Debt: Covenant modeling, subordinated intercreditor agreements, cash flow bridges.

• Acquisition Financing: Target diligence (financials, contracts, liabilities, IP).

Top Pitfalls (Now Tied to Facility Types)

• Messy SaaS Metrics (ARR, churn, gross margin) → Risk for recurring revenue lines.

• AR Quality Issues (aged receivables, consignment) → Risk for working capital lines.

• Weak Loan Tape Analytics → Risk for fintech warehouse lines.

• Unapproved Equipment Leases → Risk for equipment financings.

• Unmodeled Covenants → Risk for mezzanine facilities.

• …plus universal pitfalls like sloppy financials, disorganized data rooms, or governance gaps.

Key Takeaways

• Debt for VC-backed companies isn’t one-size-fits-all—facility type depends on the business model.

• Preparation across financial, operational, market, and legal dimensions gives you leverage.

• Investor and board alignment is just as important as financial readiness.

• The right facility, structured well, can extend runway, fund acquisitions, or scale operations—without unnecessary dilution.

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Disclosures & Disclaimers

This newsletter is provided for educational and informational purposes only. It does not constitute investment, legal, or tax advice, nor should it be relied upon as such.

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