5 Factors to Consider When Choosing Between Debt and Equity Financing

Funding Your Way Through Complex Times

factors to consider when choosing between debt and equity financing

It’s a dynamic time in the SaaS industry today, with platforms racing to integrate AI into their software, intelligently and sustainably adjust pricing to combat inflation, and grow paying subscribers despite higher levels of competition from low-code/no-code (LCNC) developers. 

As a SaaS leader, how do you ensure your platform is keeping up and achieving its goals? Obtaining additional capital is likely one of your strategies for accelerating growth, developing your platform, and enhancing key business processes and functions. While there are a number of avenues to explore and obtain this capital, two of the most common for SaaS companies are venture debt funding and equity financing.

But determining which route to go is not always a simple decision — in fact, it’s often a more strategic one that’s tied to where your business is now, where it wants to go, why the capital is needed, and more. Here, we’ll explore several factors to consider when choosing between debt and equity financing.

Is hybrid financing the way to go in the SaaS industry today? Explore the current state of the SaaS financing landscape and compare different funding sources.

Here Are Five Factors for SaaS Leaders to Consider When Choosing Between Debt and Equity Financing

  1. How will the capital be used? — This is the most important aspect of your decision. What you need the capital for is the primary focus — whether it’s to accelerate sales and marketing activity, to create greater stability in your financials or operations, to help build out your platform to meet today’s user expectations, or any other strategic purpose. As an example, venture debt is ideal for sales and marketing acceleration because it allows profits to be more easily reinvested into that activity, without the need for paying out dividends. This is often done via an interest-only loan structure, though other flexible arrangements are available.
  2. What is your timeline? — Funding timelines vastly differ between venture debt, equity, bank loans, and other sources. Understanding where you are now and what your acceptable timeline is, in conjunction with the purpose of the capital, will be essential so that you know what to expect when you start the process. For example, equity funding can take anywhere from several months to even a year to finalize, depending on who you work with. Venture debt can take anywhere from several weeks to a few months.
  3. How much complexity are you willing to navigate? — Closely related to the above is how in-depth you’re willing to go with your selection. Applications for venture debt typically do not require extensive due diligence, whereas equity funding will require a heavier and lengthier legal and financial review. As one SaaS leader excellently described, “I estimate all fundraising paperwork in inches, so I’d guess that I have a half-inch thick manila folder for our lending documents. For our equity raise, I have a two-inch binder prepared by lawyers.”
  4. How much will you invest seeking new investment? — Legal reviews, application fees, and even the cost of your own employees spending time on fundraising (as opposed to focusing on growth or other business objectives) will all add expense to whatever avenue you select. As noted above, however, some funding sources will require more or less of these expenses. If you’re clear on the purpose of your funding, the timeline involved, and the complexity required, then the associated cost should not be a surprise.
  5. What obligations are you willing to uphold/maintain? — Once your funding closes and you begin putting that capital to work, you will have different obligations based on the source you selected. With venture debt, you’ll repay principal and interest, interest only, or some other arrangement. With equity, there is no “repayment,” but you’ll have to pay your investors dividends as you generate more and more profit. And of course, depending on the avenue you chose, your exit scenario could look vastly different.

Explore Your Options with River SaaS Capital

River SaaS Capital works with SaaS companies across a variety of industries to help them get the right funding for their needs. We offer both venture debt funding as well as equity financing, often in conjunction with one another to create a complete hybrid funding solution. Whether you’re looking to accelerate growth toward a specific goal or are looking for a partner to advise you for the long-term, our expert team is ready to assist. Fill out the form below to connect with our investment team and learn more and start your growth journey. Or, if you’re ready, you can apply quickly and easily here.