For years, venture capital has been the default route for Gulf startups looking to fund rapid growth. But as founders become more cautious about dilution and investors look for more flexible ways to finance expansion, private debt is emerging as an increasingly important alternative.
In 2025, structured credit accounted for more than half of the GCC startup ecosystem’s $7.4 billion in tracked funding, reaching $4.1 billion compared with $3.3 billion in venture capital. Private debt, including venture debt and growth credit, also grew more than eightfold from around $500 million in 2024.
Saudi Arabia accounted for the vast majority of the region’s structured credit deployment, highlighting the country’s growing role in the GCC’s evolving startup funding landscape.
That deployment is highly concentrated. Fintech accounted for roughly 95.5% of the GCC total, close to $3.9 billion, much of it in a handful of large transactions, including those involving the Saudi firms Tamara and Lendo.
The shift raises questions about why more founders are turning to debt, how the region’s funding mix is changing, and whether private credit can become a more sustainable source of capital for startups and scale-ups looking to grow without giving up equity.
A LANDSCAPE SHIFT
Zeina Mandour, Venture Investments Manager at DAR Ventures, says startups are not necessarily choosing debt over equity; rather, debt is being used in areas where equity is less suitable.
“The big numbers we started seeing are lending businesses, and they’re borrowing to fund their loan books. That’s not an alternative to a funding round.”
She explains that businesses cannot efficiently fund a loan book with equity because it is too expensive. As a result, much of what appears to be a shift toward debt reflects companies that have always needed credit now being able to access it in the region.
“What changed there is simple. Venture debt only works for companies at Series A and beyond, and until recently, we just didn’t have enough companies at that stage. Now we do,” she says, adding that there were also very few funds offering this type of financing in the region.
“A few years ago, if you wanted venture debt, there was nobody to call. Now there are several players. Now there is a pipeline for entities to look at to fund, and that’s what created the momentum.”
Taha Lahbibi, Co-founder of abtal Venture Capital & Advisory, says private debt has become increasingly relevant across the GCC as founders look for alternatives to another equity round, mainly for three practical reasons.
First, founders are more conscious of dilution, particularly after building value through a difficult cycle. Second, more scale-ups now have recurring revenue, receivables, inventory or signed contracts that can support financing tied to a clear use of funds. Third, banks still tend to lend against collateral, operating history and predictable profitability.
“Private financiers can be more flexible and structure financing against a specific asset or cash flow. At the same time, private financing is not a universal solution. It only makes sense when the source of repayment is clear and the structure matches the company’s cash flow and risk profile.”
He explains that if a business is still proving its product or market, equity remains more appropriate. Private credit, he adds, gives founders greater choice while avoiding unnecessary dilution.
Máire Morris, Founder and CEO of Morris Global Consulting, says the fashion and retail industry often faces a funding gap between proving a concept and becoming attractive to institutional or larger equity investors.
“Investors typically want evidence of sales, consumer demand and a clear growth trajectory before committing significant capital. But brands need capital to create inventory, build distribution, enter markets and generate that proof in the first place. Private debt can potentially bridge that gap without founders giving away significant equity too early.”
Morris also says private debt can provide businesses with an alternative between traditional bank lending and equity financing, giving founders more flexibility when funding expansion.
“Opening a new market, increasing production or investing in distribution does not necessarily need to mean another equity round. But it also requires greater financial discipline.”
She adds that debt-funded expansion needs to be backed by realistic demand, sustainable margins, careful cash-flow planning and a clear path to repayment.
RISKS TO CONSIDER
Mandour says that, beyond the obvious need to repay debt unlike equity, there are other risks to consider.
She explains that private debt changes what a company needs to be good at.
“The skills that got founders to that stage—building the product, finding the model—are not the skills that keep the company solvent under debt.”
Companies need strong financial capabilities, including an understanding of cash-conversion cycles, accurate pricing, and forecasting, to ensure they can meet repayment obligations.
“With equity, if you have a bad quarter, nobody’s calling. You catch up on performance. With debt, it’s a completely different game, and a lot of teams take it on before they’ve built that muscle.”
She adds that venture debt is often underwritten against a founder’s ability to raise the next round. If that round does not happen, or happens at the same valuation, repayments can come due when the company has the least cash.
“Debt doesn’t just add risk, it amplifies the cycle. It’s most dangerous at the moment the market turns.”
Mandour says founders can also underestimate the terms attached to debt agreements.
“Minimum cash, revenue targets, consent rights. Breach one and the lender might call the whole thing. Founders sign these focused on the interest rate and don’t read what they’ve given up.”
Finally, she points to another issue that founders can overlook.
“Debt extends the runway but servicing it eats the runway it created. Once amortization starts, the real extension is much shorter. I believe that debt is not fully tested yet because we haven’t been through a credit cycle with this asset class in the region. Nobody really knows how enforcement and recovery play out until someone defaults.”
Lahbibi says the lack of reference points and benchmarks can hinder price discovery and leave startups unclear about the true cost of financing, severely undermining their ability to raise funds at the right price.
“Initiatives such as the UAE federal government’s regular issuances of Treasury Bonds and Sukuk to build a local dirham-denominated sovereign yield curve are a step in the right direction.”
NEEDED CHANGES
Mandour says the region’s existing financial and regulatory infrastructure was not designed with private debt for startups in mind.
“Our regulatory and credit infrastructure is designed around SMEs and companies with an existing credit base, trading history, assets, and a track record a bank can score.”
She notes that startups often do not fit these criteria, leaving them outside the traditional framework.
“It has to be adapted to fit them, not the other way around. We can learn from how this developed in the West, but it has to be localized. Copying the model wholesale won’t work here. And I don’t think we need to wait for that.”
In parallel, she says the region should encourage more specialized funds to offer private credit, arguing that greater competition among lenders could help the market and its supporting infrastructure develop faster.
Lahbibi says the region needs clearer and more consistent regulatory frameworks for private credit, direct-financing funds, private Sukuk and profit-sharing instruments.
“Progress is being made, particularly in the UAE and Saudi Arabia, but the frameworks remain fragmented. Managers and investors need greater certainty regarding who can originate and manage these transactions, which investors may participate, how products can be marketed across GCC jurisdictions, and how collateral, insolvency, restructuring, taxation and special-purpose vehicles are treated.”
He adds that private financing cannot scale without better data, professional monitoring and more predictable recovery and restructuring processes. Financiers need reliable visibility into cash flow, receivables, inventory and existing debt, while investors need consistent reporting, asset monitoring and early-warning indicators.
Lahbibi also sees an opportunity to channel more of the GCC’s private wealth into productive economic activity. Family offices and private investors hold significant liquidity, but much of it remains concentrated in real estate, listed markets and traditional fixed-income products. Properly structured private financing and Sukuk, he says, could provide greater exposure to the real economy while directing capital toward companies that create jobs, trade, and innovation.
Finally, he says founders and financiers need a clearer understanding of how equity and private financing can work together. Equity is better suited to funding long-term uncertainty, such as product development and market validation. At the same time, private financing can support more predictable, revenue-generating needs such as inventory, receivables, equipment and contracted commercial activity. This can allow companies to fund specific growth requirements without relying entirely on another equity round.
THE FUTURE OF PRIVATE DEBT
Looking ahead, Morris believes greater access to private debt could accelerate the expansion of GCC brands into new markets.
“International expansion is capital intensive. You may need additional inventory, localization, warehousing, logistics, marketing, people and distribution infrastructure before the new market generates meaningful revenue.”
However, Morris points out that there are increasingly ambitious GCC brands with genuine international potential. Still, access to the right type of growth capital can determine how quickly they can execute.
“Private debt could provide that bridge for brands that have already demonstrated demand and a viable business model, without requiring them to sell a significant portion of the company simply to fund expansion.”
She adds that the UAE banking system is not always well-suited to SMEs, particularly when financing comes with high interest rates, making private debt an alternative for businesses that can service the repayments and secure suitable terms.
Morris believes private debt will not replace equity or traditional lending, but will become another financing tool.
“The important shift is founders becoming more sophisticated about matching the type of capital to the stage and purpose of the business.”
Mandour agrees that private debt and venture capital should not be viewed as competing forms of financing.
“It can’t be one over the other. The ratio will shift year to year; it depends on how many companies reach the right stage of maturity in any given year, and which sectors they’re in.”
She says not every company is suited to private debt, and this is not necessarily a question of creditworthiness but of the business model and sector.
“A lending business will always use debt. A company still figuring out its model can’t, no matter how good it is. That’s why the two will continue to coexist. Debt can’t fund uncertainty; there has to be something to lend against. So VC isn’t being replaced; it’s being joined.”
Source link
