Debt was once seen as a stabiliser for young companies navigating the uncertainties of the startup world. But it has now become more of a noose around fledgling firms reeling from cash flow pressures.
Canada-based bookkeeping startup Bench Accounting shut down in December 2024, after a bank demanded immediate repayment of the company’s outstanding loan. In late 2023, digital freight company Convoy’s financial challenges led to the venture debt lender Hercules Capital assuming control of the firm to recover its investments.
Increasingly, lenders have stepped in where equity funding has slowed amid global market volatility to fill the funding gap. But instead of helping startups survive vulnerable phases, they end up extracting a pound of flesh that outlasts the crisis itself.
The momentary lapse of reason
Debt typically becomes an option for startup companies only when they are in serious trouble and survival is in question — delayed venture-capital infusions, the risk of missing payroll, or the need to scale ahead of revenue. During these critical moments, lenders often impose terms heavily stacked against the company and its founders.
“Heavy reliance on high-risk debt without a clear plan for future financing or profitability may deter investors from future funding rounds, creating uncertainty and caution,” said a leading debt provider.
High double-digit interest rates, upfront processing fees, balloon-style repayment schedules, and aggressive collateral demands are not unusual. The aggressive lenders also impose personal guarantees and pledge of intellectual property.
VG Siddhartha financed Café Coffee Day’s rapid growth from a single cafe in 1996 to over 1,700 outlets by 2019, largely through significant borrowings. GoMechanic’s financial troubles in 2023 revealed a web of short-term, high-cost borrowings.
Equity returns without equity risk
Unlike venture capitalists, who accept the risk of failure in exchange for equity upside, lenders have come up with structured products to enjoy equity-like returns while still getting fixed repayments. Convertible debt and revenue-based financing instruments are tilted too far toward the lender, leaving the company and its founders always catching up.
“The irony,” notes a Bengaluru-based startup advisor, “is that lenders want the upside of equity without bearing its risk. It’s a win-win for them, and often a lose-lose for the entrepreneur.”
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The tactics of pressure
When covenants get breached, debt providers ‘have to do’ what it takes to ‘protect their capital’.
The danger often becomes real very quickly once a startup misses payments. Lenders, armed with signed documents and legal levers, can act against the company and founders.
Invoking post-dated cheques: Many lenders still rely on post-dated cheques as security. If deposited and bounced, it can trigger criminal proceedings under Indian law, turning a financial dispute into a legal crisis.
Pulling funds directly from accounts: Some agreements allow lenders to debit startup bank accounts unilaterally, leaving companies scrambling to meet payroll or vendor dues.
Writing to customers: In extreme cases, lenders have written directly to a borrower’s clients, demanding that customer payments be diverted toward debt settlement. Such moves not only dry up revenues but also damage fragile business relationships beyond repair.
Their tactics weaponise the very lifelines a startup depends on — its bank account and its customer base. Once creditors start writing to your clients, your reputation is permanently damaged.
The long-term damage from short-term relief
The damage is rarely confined to the immediate repayment cycle. Restrictive covenants in loan agreements often limit how startups can spend money, hire, or even raise new investment. Some contracts are structured in ways that ensure the debt remains — renewed and rolled over endlessly.
This tends to put the founders and the company in a situation where they are servicing debt obligations years after the original crisis has passed, stunting growth and discouraging new investment.
PharmEasy’s financial troubles were also said to be because of aggressive debt structuring by Goldman Sachs.
The $285 million (Rs 2,280 crore) loan in 2022 came with high interest— reported at 17–18 per cent — and rigorous covenants that included a requirement to raise Rs 1,000 crore in equity.
The company failed to meet the condition, triggering a technical default.
Analysts described the terms as coercive: all of PharmEasy’s assets, including Thyrocare, were pledged as collateral, which gave Goldman significant control.
When PharmEasy eventually raised Rs 1,804 crore via a rights issue, it came at an over 90 per cent valuation haircut, slashing the company’s value to ~$710 million from $5.6 billion. Even major investors marked down its valuation further — Janus Henderson valued PharmEasy at just $456 million resulting in a 90 per cent drop.
It may also be argued that Goldman engineered this situation.
This was so severe that PharmEasy was forced into a high-risk refinancing, illustrating how structured loans with tight covenants can squeeze even unicorns.
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Counter-strategies are emerging
Debt is not inherently bad. When structured fairly, it remains an important tool to smooth cash cycles without immediate dilution. However, balance needs to be ensured between the lenders and the company.
Indian startups raised $1.23 billion venture debt in 2024, according to venture capital firm Stride Ventures.
Founders and advisors now suggest several counter-strategies: Conduct due diligence on lenders themselves, and reference checks by speaking to other startups who have borrowed from them. Try to replace rigid EMIs with revenue-linked repayment schedules. Negotiate hard against personal guarantees, IP pledges, and post-dated cheque demands. Wherever possible deal with specialised venture debt funds. They tend to understand startup cycles better than traditional lenders.
With equity funding continuing to remain cautious in 2025, debt will inevitably remain part of the global startup financing mix. But with new horrifying stories of debt distress coming to light, both regulators and industry associations may be compelled to act.
Startups need smarter, fairer, and more equitable structures. Revenue-based models, milestone-linked repayments, and even convertible instruments that share both risk and reward could restore the dwindling trust among lenders in the startup ecosystem.
Banudas Athreya is a TPSJ alumnus currently interning with ThePrint.
(Edited by Aamaan Alam Khan)