A few weeks ago we dug into the beautiful world of capital calls. How they work, how to run them smoothly, and how not to ruin your relationship with investors over them.

The core concept: LPs don’t give you all their committed capital upfront. Rather, you call down a percentage of capital as it’s needed.

Refresh your memory on this here.

So. Those are the basics. But what happens if the capital that you’ve called down doesn’t quite cover the investments that you want to make?

For example, imagine that you just raised $10m. You called 5% and now you have $500k in the bank. You're feeling good, ready to invest $100k checks into 5 awesome startups.

But then… uh oh.

You find SIX incredible companies to invest in. You need $600k, but only have $500k in your account.

What now?

You could do another capital call, but your LPs wired money just two weeks ago. Asking them to send more cash so soon feels unprofessional (and annoying).

This is where a line of credit or a catch-up capital call could be a good option.

Let’s talk about credit

A line of credit is basically a pre-approved loan from a bank that you can tap into when you need extra cash quickly.

It’s a financial bridge that helps you grab opportunities without waiting for your next capital call.

Here's how it works: You form a relationship with a traditional bank (often the same one that holds your fund's accounts). You agree on terms — mainly the interest rate you'll pay.

The rate is usually tied to current market rates plus a little extra for the bank.

When you need that extra $100,000 to fund your sixth company, you simply draw from your credit line. No missing out on huge opportunities, no awkward calls to LPs, no waiting.

When lines of credit make sense

Let's stick with our example. You borrow $100,000 at today's rate — maybe 7% or 8% annually.

But here's the thing: you're not borrowing for a whole year. You'll probably do another capital call in a few months and pay back that $100,000 plus maybe a couple thousand in interest.

This short-term borrowing cost is usually worth it to avoid the headaches of frequent capital calls or missed investment opportunities.

Banks love this arrangement because it's low-risk (your fund has committed capital backing it) and generates steady interest income. Fund managers love it because it gives them flexibility to move fast when great deals appear.

Now let’s talk about catch-up capital calls

There's another move that's useful if you're still actively fundraising.

Let's say you've closed a few million for your fund, but you’re still fundraising. And you’re talking to some promising LP leads.

Meanwhile, you need that extra $100,000 for the sixth company.

If you can bring in another $2 million from new investors, they'll need to do a "catch-up" capital call to match your existing 5% call level.

That's $100,000 right there — exactly what you need, but no interest costs.

This approach works when you have fundraising momentum and warm prospects ready to close. New investors expect to catch up to whatever capital call level existing LPs have already reached.

Credit vs. another capital call

Deciding between a line of credit vs doing another capital call? Here’s our version of a pro/con list:

Use credit when:

• You just did a recent capital call
• You need money quickly for time-sensitive deals
• The amount is relatively small
• Interest rates are reasonable

Do a capital call when:

• It's been several months since your last call
• You need a larger amount of capital
• Interest rates are extremely high
• You want to minimize borrowing costs
• You're not actively fundraising new LPs

A lot of funds use a combo — small credit draws for urgent needs, regular capital calls for planned deployment.

The IRR impact

There are obvious benefits to running a tight ship when it comes to having cash available to invest.

Moving fast allows you to get in on great deals before they’re over-subscribed. Founders notice your speed and will recommend you to other founders. LPs will be happy to see that your running a smooth operation.

But there’s something else to consider: your IRR.

See, money sitting in your bank account for months does absolutely nothing for your IRR. In fact, it actively hurts it.

And this is what we’re gonna dig into next week.