Leveraging Growth Lending for M&A – as featured in Xange’s M&A Playbook for European Founders

We’re delighted to have contributed to XAnge’s 2026 M&A Playbook, the operator’s manual for European founders scaling through acquisitions. Within the playbook, we look at how growth lending fits into the M&A toolkit – financing acquisitions while preserving equity.

What’s this step?
Growth lending provides high-growth and VC-backed tech companies with flexible, non-dilutive financing. It is an alternative to equity and traditional bank financing, delivered by investors who speak the founders’ language, can assess the business’s growth potential, and can match expectations regarding timing and flexibility. Growth lenders can step in at various times: alongside an equity round to extend runway, between two rounds to achieve critical milestones before the next fundraising, or after the last round to help the company reach profitability or advance towards an exit. Both organic and inorganic growth can be financed this way. M&A is becoming a bigger part of our market every year, and is a core pillar of Claret’s investment strategy in Europe.

What’s specific to VC-backed startups?
You need to validate that debt is the right instrument Before deciding whether to use venture debt for M&A, get a clear picture of four things: the cash component of the transaction, the additional cash needed to complete the integration (with a buffer), the existing cash in the bank you are ready to dedicate to the transaction, and the conditions under which your investors are willing to participate. Using those parameters, you can size the optimal equity/debt mix for risk, cost, and dilution. The more visibility you have about your VC syndicate and its capacity to support the business, the easier it will be to find lenders who value the participation of strong VCs.

The debt quantum depends on startup-specific factors
This depends on your situation. The closer the combined companies are to profitability and the more similar they are in terms of synergies, the greater the debt quantum. We generally consider 40% of combined revenues as a practical maximum for growth debt. The more different the two businesses, the more you will need to finance your cash need with an equity round, so this metric falls when a company acquires new products or a heavily cash burning business. The quantum of debt also varies based on revenue, unit economics, cash burn profile, current levels of debt, and sector.

You may not meet the eligibility criteria, yet
Eligibility criteria vary, but a certain size and maturity are required to limit the risk of additional leverage. The technology in at least one of the combining companies should be significantly de-risked—otherwise pure equity financing is a better fit—and the business needs to have reached a certain level: generally €5 million annualized for B2B and €10 million for consumer, though the level can be lower for deep tech or life science companies where IP validation is in itself a major milestone. Growth, burn, existing debt, and a solid VC syndicate able to support the company all factor into the growth lender’s assessment. Repeat acquirers are easier to fund: at Claret, we have lent multiple times to the same companies for M&A purposes, especially within the same geographic region.

Best practices for navigating this step

Get lender-ready before starting the process
Prerequisites are a structured data room and a clear financial plan for the combined business. A high level of professionalism is expected on the financial side, which should include monthly financials for the prior two years, monthly forecasts for the next two years (including cash flow statements and a balance sheet), detailed customer and cohort analysis, and analysis of KPIs. A solid CFO or Head of Finance is key: they should be capable of sharing relevant data quickly and communicating efficiently with the various parties. A growth lending process is faster than a growth equity process, since it’s designed for startups who need to move fast. Expect two to three weeks before a term sheet, followed by a month of due diligence. Compared to an equity round, the process is more finance-oriented and less product- and marketing-oriented, so your CFO will be highly involved in the discussions.

Understand the terms being discussed
The debt package focuses on the combined financial plan, making sure the transaction is financed and the business has sufficient flexibility to deal with deviations and risks. While an equity term sheet mainly focuses on valuation and dilution, and is very oriented toward governance, the implications of growth lending on governance are limited: lenders will typically only take board observer seats, but they will certainly discuss loan repayment structures. Interest rate, interest only period, and duration of amortization are key components, and venture lenders are generally flexible with the interest-only period (12–18 months on average, sometimes more), which allows startups to preserve cash in critical integration periods. Depending on the amount of leverage, financial covenants may be needed to keep the structure safe. Growth lending deals usually also have a small equity component (typically warrants), giving the lender an option to invest in equity at a set price (generally the transaction price). The other key elements are collaterals (garanties) for the debt on IP, receivables, and trademarks.

Plan for living with the loan
Companies either deliver their plan and repay the debt on schedule, or repayment becomes difficult at some point. In M&A, this can happen if the integration doesn’t work or takes longer than expected. The best approach is to be fully transparent with your lender, to identify issues early and amend the loan and restructure the amortization, usually accompanied by investor equity injections. Without equity injection, the worst case scenario is the company becoming insolvent. To avoid that situation, choose a debt provider the same way you’d choose a shareholder: someone you trust to be fast, flexible, and pragmatic in restructuring the debt. Then, carefully size the amount of debt and make sure you are confident in your ability to pay it back. Growth lenders will advise you on reasonable debt ratios (debt-to-ARR, debt-to gross margin, etc.) to limit the risk and make the acquisition a success.

Author: Clément Hardy

Download Buy to Grow: The M&A Playbook for European Founders