For over a decade, growth companies enjoyed near-zero interest rates that made debt financing remarkably cheap. The European Central Bank held rates at 0% or negative from 2015-2022, and the U.S. Federal Reserve kept rates below 0.25% until 2022.
That era is over. Since 2022, central banks have raised rates aggressively to combat inflation—the ECB's deposit rate reached 4% and the Fed's rate hit 5.5% in 2023. This shift has fundamentally changed the economics of debt financing for growth companies. Here's what you need to know.
The New Interest Rate Reality
2015-2021: The Low-Rate Era
- •ECB deposit rate: 0% to -0.5%
- •Venture debt: 6-10% all-in cost
- •Asset-based lending: 3-7%
- •Abundant capital availability
2023-2024: The High-Rate Era
- •ECB deposit rate: 3.5-4%
- •Venture debt: 10-16% all-in cost
- •Asset-based lending: 7-12%
- •More selective lender criteria
The impact is clear: the cost of debt has roughly doubled for most growth companies. But the story is more nuanced than just higher rates—the entire debt market has shifted.
5 Key Changes in the Debt Financing Landscape
Lenders Are More Selective
When base rates were zero, lenders competed aggressively for deals. Now, with safer alternatives yielding 4-5%, lenders can afford to be choosy.
What Lenders Want Now:
- ✓ Stronger revenue traction (€2M+ ARR for venture debt)
- ✓ Path to profitability within 18-24 months
- ✓ Recent equity backing from tier-1 investors
- ✓ Better unit economics and cash conversion
- ✓ More conservative growth assumptions
Loan Sizes Have Decreased
Lenders are offering smaller facilities relative to equity raised. The old rule of "30-40% of your last round" has shifted to "20-30%" in many cases.
2021 Example:
€10M Series A → €3-4M debt available
2024 Example:
€10M Series A → €2-3M debt available
Covenant Structures Have Tightened
Lenders are imposing stricter financial covenants and monitoring requirements. Cash runway covenants, revenue targets, and burn multiples are more common.
Common New Covenants:
- • Minimum cash balance (e.g., 6 months runway at all times)
- • Quarterly revenue targets with % tolerance
- • Maximum burn rate or burn multiple thresholds
- • Stricter restrictions on additional debt or M&A
Warrant-Free Deals Are Growing
Paradoxically, higher rates have accelerated the shift to pure interest models. With 12-15% interest rates, lenders don't need warrant coverage to hit return targets.
This is actually good news for founders: while headline rates are higher, you may avoid equity dilution entirely. The total cost of capital can still be competitive.
Alternative Structures Emerging
Higher rates have spurred innovation: revenue-based financing, flexible credit lines, and hybrid instruments are gaining traction as founders seek alternatives to traditional term loans.
Popular Alternatives:
- • Revenue-based financing (pay as % of revenue)
- • Revolving credit facilities (pay only for what you use)
- • Delayed draw term loans (commit now, draw later)
- • Asset-backed facilities (lower rates if you have AR/inventory)
Strategic Implications for Growth Companies
1. Debt Is Still Valuable—But You Must Be More Strategic
Even at 12-15%, debt is less dilutive than equity for most companies. But you can't be casual about it anymore. Every euro of debt must have a clear ROI.
Action Items:
- ✓ Model true cost of debt vs. equity dilution for your specific situation
- ✓ Define specific use cases with measurable outcomes
- ✓ Ensure you can service debt even if growth slows by 30-40%
2. Build Lender Relationships Early
In a selective market, warm relationships matter. Start conversations 6-12 months before you need capital. Lenders want to track your progress over time.
Action Items:
- ✓ Take intro calls with 3-5 lenders even if you don't need debt yet
- ✓ Share quarterly updates with potential lenders
- ✓ Get feedback on what they'd need to see to provide capital
3. Consider Shorter-Term Facilities
If you believe rates will eventually decline, consider 18-24 month facilities instead of 36-48 months. You can refinance at lower rates later.
Trade-off:
Shorter terms = less certainty but refinancing optionality. Longer terms = higher rates but guaranteed capital.
4. Optimize for Flexibility, Not Just Price
In uncertain times, covenant flexibility is more valuable than saving 1-2% on interest. Negotiate for covenant relief provisions and modification rights.
Key Negotiation Points:
- ✓ Covenant holiday periods (first 6-12 months)
- ✓ Carve-outs for specific strategic initiatives
- ✓ Amendment rights without prohibitive fees
- ✓ Prepayment flexibility (low or no penalties)
When Will Rates Come Down?
The honest answer: Nobody knows for certain. Central banks signal that rates will remain "higher for longer" through 2024-2025, but eventual cuts are expected.
Consensus Forecast (as of late 2024):
- • 2024-2025: Rates stay elevated (3.5-4% ECB, 4.5-5% Fed)
- • 2025-2026: Gradual cuts begin if inflation controlled
- • 2027+: Likely settle at "new neutral" of 2-3% (not zero)
Key Insight: We're unlikely to return to the 0% era. Plan for a "new normal" where base rates are 2-3% and debt costs are structurally higher than 2015-2021.
How TULA Capital Helps in This Environment
In a high-rate, selective lending market, expertise and relationships matter more than ever. TULA Capital's advisors help growth companies:
- ✓Navigate lender selection in a tighter market
- ✓Benchmark terms to ensure competitive pricing
- ✓Negotiate favorable covenants and flexibility
- ✓Model debt vs. equity trade-offs at current rates
- ✓Access alternative structures (RBF, ABL, delayed draw)
- ✓Prepare compelling lender materials that win deals