Whether you’ve already grown a successful SaaS company or are just entering this stage at your first business, this is a pivotal time ahead of any future fundraising efforts.
You’ve already worked hard, whether through bootstrapping or early-stage funding programs, to get to this point. At this stage, you’ve refined your platform, built a sticky customer base, implemented your go-to-market strategy, and finalized other key essentials. Now, it’s time to take things to the next level. You could continue growing organically, but that growth can be accelerated through outside investment. You have options, but choosing a non-dilutive growth avenue is the ideal way to achieve your goals.
But why is that? Why not consider a venture capital firm, private equity, or angel investor? You could opt to go that route, but at this important stage, the platform you’ve put so much time into is ready to take off. While equity-based funding will give you the resources you need to pursue opportunities right now, giving up that equity at this stage does more than dilute your ownership. It dilutes your vision. It dilutes your drive. It dilutes your direction.
You’re the one who has built this business and system, and you know it better than anyone else. You should be the one driving its future, and only one capital solution offers the non-dilutive growth designed to keep you fully in the driver seat from day one: venture debt financing.
Understanding Debt Financing for SaaS Companies
Venture debt financing is one of the best ways to achieve non-dilutive growth in your business and platform. Just as it sounds, venture debt financing is a loan as opposed to equity investment and can be structured in a variety of ways depending on your goals and your financial strategy. As long as you meet your lender’s revenue requirements and other criteria, qualifying should be a breeze.
For example, if you already have strong revenues and margins, you might opt for a standard installment arrangement in which you pay the debt back over a few years with consistent monthly payments. If you want investment benefits earlier on, an interest-only structure might be more beneficial as you’ll only need to make interest payments on the loan amount (though you’ll have larger principal payments later or will need to make a balloon payment).
Another common approach is a step-up structure. In this arrangement, your payments are tied to your monthly revenue. Another term for this is revenue-based financing, but some lenders differ when it comes to the details. For example, River SaaS Capital offers a step-up structure in which payments increase alongside revenues, but all of this is determined upfront during the application process. Traditional revenue-based financing is purely tied to your revenue, so you won’t be able to know what your payment will be until you know how the business has done during a given month. There are other differences that you can learn about here.
Overall, venture debt financing stands in stark contrast to equity alternatives when it comes to non-dilutive growth because you remain in complete control. With equity, you’ll not only lose a percentage of ownership in your business, but you’ll also likely have to give up a board seat to the investor. This gives them an active role in the daily running of your company. You’ll have to consider their preferences at the decision-making table until they decide to exit.
A Key Consideration with Debt Financing Lenders
While every lender is different, it’s important to work with one that doesn’t use warrants. With equity financing, you have to give up a portion of ownership in your business in order to receive growth capital. While it’s not necessarily immediate equity, some venture debt lenders require their borrowers to provide warrants in exchange for their debt capital (that, or the lender will accept them as an incentive to lend).
Warrants are a financial mechanism in which a company agrees to sell stock to a lender at a certain price up to a specific time period. At any point before that time, the lender has the freedom to ‘exercise the warrant,’ allowing them to buy your stock at a fixed price (even if the stock is worth more). This gives them an immediate ownership position in the company similar to an equity investor. You’ll likely have to pay them dividends, which further eats into your profits. Learn more about warrants in our free ebook.
Because debt financing ensures non-dilutive growth, you’ll be able to put the capital to work faster than alternative avenues. While you’ll have to make payments in some form, these will be defined early on so you know what to expect and can factor them into your financial strategy. As your revenue increases due to sales and marketing acceleration, you’ll be able to enjoy more of your profits and use them more strategically.
Debt financing also benefits founders should they decide to exit down the road. As long as the debt is satisfied, the growth achieved and the resulting sale price ensure a greater takeaway for founders. With equity, dividends and an eventual payout equivalent to the investor’s holdings will be required, which — depending on your success — could be significant. You won’t have as much time to plan for this, either, as the investor could decide to exit at virtually any time. Compare debt and equity side-by-side in this free infographic to get more insights.
Ready for a Non-Dilutive Growth Solution?
River SaaS Capital offers flexible venture debt financing solutions for growing SaaS companies. We’ve successfully helped a number of technology startups put our growth capital to work for new marketing initiatives, sales hires and programs, and more — and we’re ready to do the same for you. Learn more about our process, our criteria, and our investment team.