What is debt?
Debt is borrowed capital that the company is contractually obligated to repay: typically with interest: over a defined period. Debt sits on the balance sheet as a liability; interest flows through the income statement; principal and interest payments hit the financing and operating sections of the cash flow statement.
Common forms
- Bank term loan: fixed schedule, fixed or floating rate, financial covenants.
- Revolving credit facility: drawable up to a limit, useful for working-capital swings.
- Bond / note issuance: tradable debt instruments, public or private placement.
- Convertible note: debt that converts to equity at a triggering event: used heavily by early-stage startups before priced rounds.
- Venture debt: hybrid loan + warrants extended to venture-backed companies; complements equity rather than replacing it.
Debt vs. equity financing
- Cost: debt is generally cheaper after tax (interest is deductible) but rigid: fixed payments regardless of revenue.
- Control: debt does not dilute ownership but typically imposes covenants and board observation rights.
- Risk: excessive debt amplifies returns in growth and amplifies losses in downturn: the classic financial-leverage trade-off.
Metrics that matter
- Debt-to-equity: capital-structure leverage.
- Net debt: total debt minus cash.
- Debt-to-EBITDA: how many years of operating cash flow needed to repay; lenders cap this in covenants.
- Interest coverage: EBIT ÷ interest expense; below 2× signals stress.
The many forms of debt on a startup balance sheet
In the venture world, “debt” is not uniform, and each form has its own legal regime:
- Convertible instruments: debt until maturity, then equity; the conversion mechanics should be tied to the procedure under the Turkish Commercial Code (TCC).
- Venture debt: comes with warrant coverage and negative covenants.
- Shareholder loans: pass through the thin capitalization threshold (Article 12 of the Corporate Tax Law, KVK) and the transfer pricing filter.
- Trade payables and deferred revenue: liabilities in accounting terms, a customer commitment in economic terms.
At the deal table, the definition of “net debt” is a negotiation over which of these forms count as debt: SAFEs, severance provisions and tax restructurings are written in item by item. At the crisis threshold, classification determines the outcome of the Article 376 TCC test: converting shareholder loans into capital (debt waiver, capital advance) is a standard balance-sheet repair tool and should be planned together with its tax effects.
Do: match the debt’s tenor and amortisation to the cash-flow profile of the asset it funds; build a covenant compliance dashboard.
Don’t: use debt as a substitute for equity in an unproven business model: debt service is the first cost to fail when growth stalls.