Spresso, a $5M ARR SaaS company, maintains a conservative debt strategy. Leverage is kept below 10% of ARR (e.g., <$500k debt on $5M revenue) at a ~10% interest rate. The lender also received warrants for an equity position under 10%, providing a clear model for early-stage debt.

The most significant risk in software-focused private credit isn't established companies but those underwritten on Annual Recurring Revenue (ARR) multiples instead of cash flow. These high-growth, non-cash-flowing businesses may never reach profitability if disrupted by AI, creating a major potential vulnerability.

Founders often see venture debt as cheap runway extension. However, it introduces restrictive covenants and a fixed repayment schedule, making it harder to pivot when necessary. This fragility is a high price to pay, as debt holders' incentives are misaligned with long-term equity growth.

By engineering your model so that the gross profit from a new customer in their first 30 days exceeds your acquisition cost (CAC), you can fund marketing on an interest-free credit card. The customer's own payment repays the debt before interest accrues, creating a self-funding growth loop.

Knowing your Customer Acquisition Cost (CAC) isn't enough. You must track how quickly you earn that money back (payback period). A long payback period means fast growth consumes cash, potentially leading to failure even with a high LTV. Use tools like setup fees to shorten this cycle.

For asset-heavy hard tech companies, debt is most effective not as a bridge to the next equity round, but to finance long-lived assets (e.g., machinery) that are directly tied to contracted revenue. This approach de-risks the loan and supports scalable growth without excessive equity dilution, a sharp contrast to SaaS venture debt norms.

Lending to negative-EBITDA companies based on Annual Recurring Revenue (ARR) is functionally venture lending. However, these credit instruments often lack equity warrants. This creates a poor risk-reward asymmetry for the lender, who assumes the high failure risk of an early-stage company without participating in the potential equity upside.

While a healthy LTV to CAC ratio is important, the speed at which you recover acquisition costs (payback period) is the true accelerator of growth. A shorter payback period allows for faster reinvestment of capital into acquiring the next customer, compounding growth exponentially.

Businesses with dependable but slow-paying customers, such as the government or insurance providers, can face cash flow crises. Financial tools like 'factoring' allow them to secure a loan against these future receivables, providing the essential short-term liquidity needed to survive and grow.