Draw the credit line before you need it

A credit line is insurance that pays out only while you don't need it. Founders hear some version of that, nod, and then draw the line at the exact moment it stops working. At one company, a $5M revolver opened in good times on the board's advice sat untouched for a full year.

The covenants were light: a minimum cash balance, a revenue floor, debt-service coverage. The business had cleared all three with room to spare when the line opened. Then Q3 softened. Burn climbed. At one point he drew $2M as a cushion, and the draw closed in late September.

Two weeks later, the company missed the Q3 revenue covenant. The bank, within its rights, sent a notice of default. The notice tripped cross-default clauses in the other agreements. A relationship that had been warm for the year the line sat idle turned formal and adversarial inside a week.

The next four months went to negotiating with the bank, resetting covenants, paying down part of the draw, and finally taking an emergency equity round on ugly terms to clear the bank entirely. The line sold as insurance had worked as a tripwire, turning a soft quarter into an acute cash crisis.

This is the most counterintuitive way venture debt fails, and the most common. Founders port over the mental model from equity. Equity investors fund you precisely when you need cash. Banks fund you when their own risk is lowest, which is when you don't need it. The two relationships are inverted, and treating a bank like a flexible equity source is a lesson that arrives with a bill.

Covenants are the reason. Most venture-debt facilities carry minimums on cash, revenue, MRR growth, or debt-service coverage. They sit loose enough that a healthy company forgets they exist. They bind hardest right when the business weakens, which is right when the founder wants to draw. While the covenants hold, the draw is yours. The moment they break, the bank can call the loan, freeze the line, or attach conditions you can't meet.

So draw on strength. Use the cash for working capital, an opportunistic move, or a bridge across a known gap that predictable revenue closes. All of that is safe while the business is healthy. None of it survives a downturn, because weakness and covenant pressure show up together. When your runway turns out shorter than you thought, the line you were counting on is the line you can't safely touch.

Banks behave nothing like equity investors when a company is in trouble. The equity investor whose portfolio company is struggling often doubles down. The bank does the opposite: tightens terms, blocks further draws, readies itself to call the loan. Its risk posture is built to be adversarial to a company in distress. So treat the line as insurance for known events, not a parachute for surprises. For a genuine shortfall, equity is the only safe option, even at a bad price. The dilution stings, but the investor you take in a hurry stings less than a covenant breach that ends the banking relationship.

The umbrella works in the sun. That isn't a flaw in the umbrella. It's the whole design, and the founders who thrive on debt are the ones who read the fine print before the weather turns.