When you are working on an equity term sheet, you should consider initiating a conversation with a lender about venture debt. Typically, venture debt is synced up to close a few months after a fresh round of equity. Raising debt when the company is flush with cash may seem counterintuitive, but in many cases the debt can be structured with an extended “draw period” so that the loan need not be funded right away. Regardless of when you want to actually fund the loan, your creditworthiness and bargaining leverage are highest immediately after closing on new equity.
Conversely, soliciting venture debt when liquidity is diminished and the operating runway is minimal will inevitably prove more arduous and more expensive. It helps to recall that the venture industry is highly cyclical and venture debt availability is highly correlated to industry valuation trends. The availability of venture debt and the variety of loan structure options will expand and contract in response to venture capital trends, the direction of valuations in your particular sector and the business cycle across the broader economy. Think of yourself as the proverbial “umbrella shopper.” The best time to test the market is when there isn’t a cloud in the sky, and the worst time is when the storm is already lashing at your windows.