By Jason Georgatos, President at PFG
This article is the first in a three-part series exploring how growth debt works at PFG, from founder need, to deal execution, to investor impact. Each installment offers an inside look at how we partner with scaling companies at every stage of the capital journey. In this first segment, we focus on founder need: when it makes sense to consider growth debt, and what signals a company is ready.
For founders and leaders of scaling tech companies, growth often brings as much pressure as it does potential. The product is working. Demand is rising. Teams are stretched, and expansion plans are clear, but the path forward still requires capital.
Equity remains a powerful tool, especially in the early stages, but as businesses mature, many teams begin exploring additional ways to fund growth. For companies with strong fundamentals and clear expansion goals, growth debt can serve as a strategic complement to equity, offering access to capital without further dilution.
When’s the right time to consider growth debt
There comes a point when a business’s success outgrows its current infrastructure. They can’t keep up with demand, they don’t have the salespeople to expand into new regions, or they lack the engineering resources to ship the features customers are asking for. In short: the business is working, and it’s time to grow.
At this stage, many companies fall into a lending gap. They’re too mature for seed capital, but not yet profitable enough to attract attention from banks or institutional lenders. That’s where a debt financing partner like PFG can make a difference: by helping companies bridge to profitability or a higher valuation without diluting ownership.
Unlike equity, growth debt isn’t permanent. Once it’s repaid, it disappears from the cap table.
At PFG, we typically partner with companies at critical inflection points, including:
- Making an acquisition
- Expanding into new markets
- Building inventory
- Scaling sales and marketing teams
- Bridging to profitability
So what’s the growth sweet spot? Here’s what we look for:
- Revenue scale: While traditional banks rely on profit history, we look at future potential. A strong candidate typically has $5-10 million in annual revenue and is growing at 20% or more year-over-year.
- Low burn rate: We understand that startups, especially in tech, burn cash. But we’re cautious about putting debt on businesses with high or uncontrolled burn. We look for evidence that burn is stabilizing or improving.
- Clear use of proceeds: We talk a lot internally about right-sizing deals. A clear capital plan, whether it’s for hiring, market expansion, or M&A, helps us structure a deal that supports growth without overleveraging.
- Strong fundamentals: Since many of our borrowers don’t yet have EBITDA multiples or profit history, we focus on other signals: recurring revenue, healthy gross margins, disciplined forecasting, and a clear path to profitability.
- Bootstrapped or sponsor-backed: Whether the business is venture-backed or bootstrapped, growth debt can work. What matters most is where the company is headed – and whether the fundamentals support smart, scalable growth.
When’s not the right time?
There are times when debt financing isn’t the right move. For companies that are pre-revenue or still validating their product, debt is probably the wrong tool, putting repayment pressure on a business before it has the means to manage it. In those early stages, equity is usually the better option. It’s patient capital that allows room to iterate, pivot, or even pause.
Debt can also become a burden when applied at the wrong time. Here are a few red flags we look for:
- High existing debt: If a company is already carrying significant debt, more capital won’t help – it will likely just compound the problem.
- Low revenue visibility and margins: Companies with recurring revenue and strong gross margins are better positioned to forecast accurately and withstand bumps in the road.
- Unproven unit economics: Unit economics help determine whether a short-term capital infusion will accelerate growth, or become a long-term liability.
- Excessive burn: Growth capital should be a bridge, not a parachute. If burn is uncontrolled, even a well-structured deal can become a drag.
Too often, founders are hesitant to explore debt, even when it’s the better fit. They worry it signals financial distress or adds risk. In truth, the opposite is often true.
Institutional investors see our portfolio companies as disciplined and prepared. Growth debt, in their eyes, is a sign of confidence, not weakness. It shows founders are in control, know what they need, and are unwilling to give away more equity than necessary.
It’s also not an either/or decision. Many of the best capital stacks we’ve seen combine equity and debt. A hybrid model gives founders optionality and balance.
What to look for in a lending partner
Growth debt can be a great tool for companies looking to scale, but only if they choose the right partner. At PFG, we ask a lot of questions. Not to be difficult, but because getting it right matters. A good lending partner should prioritize right-sizing the deal, not pushing capital or cookie-cutter products.
Here are a few green flags to look for when choosing a lending partner:
- They ask thoughtful, tough questions.
- They’ve done deals in your sector or region.
- They’re willing to tailor the structure to your goals.
- They’re happy to connect you with other founders, even ones who’ve gone through tough times.
On the flip side, be wary of lenders who:
- Push capital without trying to understand your business
- Have no clear process for scaling with you
- Lack flexibility or real-world experience in your market
- Push products instead of solutions
A lending relationship isn’t just about capital, it’s about alignment. The right partner will be in the room when things get complicated, not just when everything’s going to plan.
What to consider before raising growth debt
Even for strong candidates, growth debt requires careful planning. Founders should be proactive about a few key areas:
- Avoid raising too much equity too early: Topping off a big equity round with more capital than you need can create unrealistic ROI expectations. When companies over-raise and under-deliver, they risk losing investor support or in extreme cases, getting replaced.
- Don’t overleverage: Taking on too much debt without sales visibility or proven margins puts strain on cash flow and limits flexibility.
- Have a clear plan: Know exactly how the capital will be used. What’s the ROI? What milestones will it unlock? Whether it’s headcount growth, market expansion, or a strategic acquisition, clarity is key.
- Treat lenders like long-term partners: A good lender doesn’t just write checks. They understand your business, help you size debt appropriately, and can offer constructive solutions when the unexpected happens.
Growth debt won’t be right for every business. But if the product is working, the team is executing, and the growth story is gaining traction, it might just be the tool that gets a company to its next milestone.
The views expressed are my own and do not necessarily reflect those of my employer.
