Why Debt Capital Makes Sense for Growth
If you’re looking to grow your SaaS business quickly and with as little distraction as possible, debt capital is one of the most advantageous solutions — for both the short and long term. There are a few types of venture debt financing, and we’ll explore those shortly, but first it’s important to understand why debt financing is preferable over other avenues.
Why Not Equity?
Equity financing certainly has its place, and you might even already have equity investment from a venture capital firm, private equity firm, or an angel investor, but when it comes to sheer growth potential, debt financing is simply the best option. While debt obviously has obligations such as making principal and interest payments and maintaining certain performance levels (also known as covenants), that’s the extent of its limitations.
With equity, your company is bringing in an external company or individual as an investor who will own a percentage of the business. They will most likely occupy a seat on your board as well, giving them a strong say in your decision-making, who you hire for key roles, what tools or systems you invest in, and so on. As your profit increases, so too will the portion paid to that investor in dividends. While the investor may exit down the road, as long as they own a stake, you’ll need to continue paying them.
Why Not Bank Loans?
Bank loans are similar to one of the types of venture debt financing in that it’s an installment loan. You get a certain amount of capital to be repaid with interest over a specific period of time. However, bank loans typically require assets in order to qualify, such as property and equipment. As a growing SaaS company, you might lack the assets needed to qualify. With SaaS debt funding, you don’t need those assets. Instead, intellectual property is used as collateral. That might sound risky, but if you have a strong subscriber base already and a solid strategy, it’s less of a barrier to growth.
All Right, Let’s Explore the Types of Debt Financing
Standard Installment Loans
Similar to a bank loan, this type of venture debt financing provides you with capital of anywhere from $500,000 to $1,500,000 (up to $5 million in some cases) based on your company and what you’re looking to achieve. This debt capital investment is repaid over a few years and includes principal and interest. Funds are available in a lump sum, or you can take advantage of tranches, which allow you to use portions of the total loan amount at a time. This is beneficial because it eliminates the need to pay interest on the total loan amount and instead requires P&I payments on the tranche portion.
A standard installment loan is preferable if you already know where you’re going to utilize the debt capital and are in a strong enough position to make P&I payments. If you want to break it up into smaller portions, the tranche option is available. An additional flexibility here is that you can borrow any principal that you’ve already paid, allowing you to extend the life of your SaaS debt funding.
One of the most flexible types of venture debt, interest-only debt financing is exactly what it sounds like: you’ll only pay the interest on your debt capital investment for a predetermined time. Eventually, you can either pay the loan in full or begin P&I payments. The key advantage with this type of venture debt is that the repayment obligation at first is more manageable being that it’s interest-only. This allows you to keep more of your revenue and profit to allocate toward additional growth opportunities. One common use for interest-only venture debt is using the base loan amount to stabilize operations and accelerate growth while only paying interest on the loan amount.
Step-up venture debt structures are similar to revenue-based financing, in which your payments scale alongside your monthly revenue. But whereas revenue-based financing is unpredictable and payments can change from month to month, step-up structure venture debt features terms and conditions that are defined and known at the inception of the loan. This ensures that you know exactly what to expect at all times as your revenue and profitability increases. This is ideal if you want to retain more of your profitability earlier in the life of your loan yet be able to start paying off principal as you grow.
We’ll Help You Build the Right Debt Capital Program
River SaaS Capital provides all three types of venture debt financing. Our investment team will work with you to learn more about your company and platform as well as your growth strategy. Then, we’ll help you build a SaaS debt funding solution to help you achieve your goals. We’ve helped numerous companies leverage the advantages of debt capital for their success, and we’re ready to help you do the same.