When you’re ready to take your SaaS business to the next level, you need a funding solution that leverages the growth you’ve established and gives you the flexibility to scale faster.
Whether you’ve already had experience with angel investors, venture capital firms, debt financing companies, or even funding via bank loans, only one solution stands above the rest when it comes to financing for high-margin SaaS companies: debt.
It might seem counterintuitive that debt can help you grow your business faster than other sources, and we’ll explain why shortly. But first, it’s also important to frame this discussion through the pros and cons of these various funding sources.
Angel Investors and Venture Capital
- Pros — In addition to providing strong working capital, you gain access to a variety of industry contacts that can help you business in multiple ways (marketing partners, HR support, etc.) as well as a deeply involved partner that will be there to guide and support you along the way. They’ll have a stake in your company, which keeps them committed to seeing the partnership through toward success.
- Cons — Because VCs and angel investors hold a stake in your company, you’ll likely have to give up a seat on your board. This means there’ll be another voice that you have to consider when making decisions. Additionally, they can essentially stay invested in your company as long as they want, which means you’ll be paying dividends to them until they decide to exit.
- Pros — Perhaps the greatest benefit of a bank loan as financing for high-margin SaaS companies is that the capital is fairly cheap to acquire. Interest rates are typically lower than other options. You can also generally use the capital how you see fit, and you might be able to get the funding even if you’re not yet profitable.
- Cons — The largest barrier to getting bank funding as a SaaS company is that they typically require assets as collateral (buildings, equipment, etc.). In today’s world, most SaaS companies run asset-light — utilizing other companies’ infrastructure to run their solutions. This means it might be difficult to qualify without usable assets.
Venture Debt Financing
- Pros — The benefits of venture debt financing for high-margin SaaS companies are numerous, but a concise rundown includes no dilution of stock or ownership, greater flexibility in eligibility and capital usage, repayment flexibility, and more. You can go deeper into the benefits of venture debt financing here.
- Cons — This depends on the lender, but the interest rate on the loan will be higher than a bank loan. You also might not get an active partner to advise you, and warrants may be required. Additionally, the lender will require some other form of collateral such as intellectual property. Again, every lender is different, so it’s important to research a debt lending company that works for your goals.
Why Debt Stands Out for Financing High-Margin SaaS Companies
Clearly, each financing solution has its benefits, but there are key aspects of venture debt financing that make it ideal for SaaS companies that are ready to ramp up their growth:
- Multiple Structures — At River SaaS Capital, we offer three distinct options (which themselves are even more flexible once goals are determined) for our venture debt. Standard installment, step-up (akin to revenue-based repayment), and interest-only structures are available based on your objectives. Most SaaS companies take advantage of our interest-only option.
- Strategic Flexibility — Closely related to the above is the fact that by selecting the right loan structure, SaaS companies can use our capital to implement their growth strategy while retaining and using more of their profit early on. For example, many SaaS companies use an interest-only structure where the first 12 or 18 months of a loan term only require the interest to be paid. At the end of the loan period, they can make a balloon payment or refinance the loan.
- Designed for Growth — Whereas equity-based funding is ideal for platform development and other infrastructure needs, venture debt financing is ideally suited to be used where it will make the most immediate impact. SaaS companies often use debt to hire key sales and marketing positions or launch or expand marketing initiatives. Additional uses include extending cash runways between equity rounds.
- Non-Dilutive Funding — With venture debt financing, you don’t have to give up equity in your business. You get the capital you need to put your growth strategy to work right away while retaining 100% ownership and control over the direction you set. And at River SaaS Capital, we don’t take warrants — a key distinction over other venture debt lenders.
Let’s Build a Venture Debt Solution That Supports Your Goals
River SaaS Capital has been financing high-margin SaaS companies across multiple industries for years. Using our funding, founders and leaders have been able to achieve significant, measurable results for their businesses. Learn more about our portfolio companies as well as how our financing works.
When you’re ready, fill out the form below to connect with our investment team.