Unlike equity, which has relatively undefined and uncapped payback, debt requires a company to make required loan payments or "Debt Service" regardless of the company situation. For this reason, it is always essential to closely evaluate any obligations that the company takes. Taking on too much debt and being unable to service it can be dangerous for the company and its shareholders.

Debt payments mean a higher burn for a traditional VC-backed company with little to no cash flow. If the company runs the Blitzscaling "burn to grow" playbook, it's important to keep debt service to less than ⅓ of total burn.

When a business is dependent on investor capital, it creates a bit of a robbing Peter to pay Paul scenario, with the VCs being Peter. Investors want to see their money going into revenue growth and market share – not repaying loans. Managing it under ⅓ of total burn will give you the benefits of using debt but avoid the debt being a drag on the investment dollars you receive.

Suppose a business takes on a manageable amount of debt. In that case, the company, its founders, and its investors could see that, in some cases, debt would be a more cost-effective source of capital (read: less dilution) than raising the same amount in equity.

As a reminder, you ALWAYS have to service the capital provided to the business – whether it's debt, with set loan repayments, or equity, which removes some founder controls and takes a percentage of proceeds at the exit. Analyzing the debt service a company can manage is undoubtedly essential, but keep in mind that all capital providers, including equity, expect a return.

There are a few other ratios to monitor how much debt is appropriate for a business, and we'll explore those in future posts, but most calculations require cash flow to justify debt service.