Is your business ready for growth debt? A readiness test

Founders come to me most weeks opening with some version of “I’m looking at a growth debt facility.” That is the last question to ask, not the first. The first one is what the business actually needs to grow, and whether borrowing helps with that or just adds risk you cannot manage.

Debt is a tool. It pays to know the job before you reach for it. Founders skip that step for a reason, and it is not carelessness. The whole system treats equity as the default and debt as the exception. Venture funds get paid to deploy. Advisers get paid to close rounds. Nobody in the room has any reason to tell a founder to go borrow half of this instead. So you walk in asking how much you can raise, when the question that decides your outcome is what the money does to your ownership and whether you can pay it back.

What has to be true before debt makes sense

One principle sits underneath everything else. The business risk has to be largely gone before you put financial risk on top of it. Equity can sit through a bad quarter and wait. Debt cannot. A bad month is still a payment that leaves the account. So before I will have a real conversation about a facility, I want four things to be true.

Get all four and we have something to talk about. Miss one and I will tell you. Equity absorbs uncertainty. Debt does not. A bad quarter on equity is uncomfortable. On debt it can turn into a cash problem that feeds on itself.

There is one test buried inside that last point that does more work than all the rest. Take your revenue plan, cut it by 30 percent, and see whether the company still makes the repayments and survives. Not whether it is comfortable. Whether it survives. I meet plenty of founders who have modelled the upside in great detail and never once modelled the miss. If you have not run that number, the business is not ready yet, however good the growth looks.

The five times I say: don’t take my money

Turning a founder down is sometimes the most useful thing I can do for them. These are the situations where borrowing is the wrong answer and I will point them back to equity every time.

None of this means the company is bad. It is about timing. A business that fails the test today can pass it in two quarters once the foundations are in place. Taking debt fast because equity feels too dilutive is not a strategy, it is a bet that the next few months go to plan. And borrowing does nothing for a valuation problem. It just stacks financial risk on top of business risk you are already carrying.

The equity underneath has to be solid

Debt sits on top of your equity, so the equity story has to hold. Your existing investors are behind you, the cap table is clean, and the next raise is either confirmed or clearly within reach on your numbers alone. Where that is the case, debt does what it is supposed to do. It speeds you up and protects your ownership. Where the foundation is shaky, with a messy cap table or investors pulling in different directions or a round that may not happen, debt does not steady any of it. It widens the cracks, and faster than you expect.

What surprises founders six months in

Two things, usually. The first is the cash discipline. Equity forgives a bad month and you have a conversation about it. Debt does not forgive anything; the payment goes out whatever happened that month. The founders who get caught are the ones who modelled their repayments against the best case. Six months in, with growth running behind plan, the payment does not move to meet them.

The second is how much the lender turns out to matter. I watched a borrower pick a lender on the lowest headline rate, hit a slow patch, and call for help, then sit through three days of silence before the lender finally picked up and went straight to the covenant. A covenant, in plain terms, is a rule in the loan that hands the lender certain rights if you break it, such as demanding early repayment. That episode cost the founder far more in time, stress, and equity given away later than the rate saving was ever worth.

The lesson from all of it is simple enough. The person who sells you the loan should be able to change it when reality changes. If they cannot, the rate barely matters. And the first sign that a loan is heading for trouble is almost never a number. It shows up in behaviour. Forecasts that drift a little further each quarter. Reporting that gets thinner as things get harder. A founder who goes quiet at the exact moment they should be calling.

Equity can afford optimism. Credit cannot afford denial. So before you sit across from any lender, have the harder conversation with yourself first. Are you doing this because the business supports it, or because raising equity hurts right now? If it is the first, and you have a repayment path that does not hang on the next round, unit economics that hold, and a clear use for the money, go in with confidence. If it is the second, fix the business or the valuation story first and then come back.

The readiness test is not there to keep founders out. It is there so the founders who take debt are the ones who keep their company.