What to Know Before Entering a Venture Debt Agreement

Debt financing is a vital funding resource for SaaS companies. Whether you’re between raise rounds and need capital to keep accelerating your growth, or you’re seeking alternative funding options to mitigate your equity dilution, venture debt financing can provide you with a financial avenue for scaling. Easily and quickly accessible, this flexible funding option provides the capital you need to make an impact now and doesn’t dilute your company shares in the process like equity financing. The terms of your financing are established in your venture debt agreement.

Before you enter a venture debt agreement, there are some key factors you should know about how the debt must be repaid and used, and how it impacts your ownership. We’re here to break it down for you.

Venture Debt Has Unique, Flexible Repayment Terms

For SaaS companies entering a venture debt agreement, an important initial question arises: when and how must you pay the debt back? The answer is determined by the type of loan you pursue. Venture debt financing is a flexible funding option with various loan types available, each with its unique advantages. A debt funding expert can help you explore the best option for your needs and goals.

With a standard installment loan, SaaS companies will make a series of principal and interest payments over a period of time determined by you and the lender, typically three to five years. In return, you’ll be provided a lump sum payment of debt capital, or you can choose to take portions of the loan as needed through tranches instead. You and your lender will determine a standard installment loan’s repayment schedule, but you can expect to make a series of payments including principal and interest for multiple years unless you decide to pay it off sooner.

Another flexible funding option is interest-only debt financing. With this structure, you will owe only the interest initially, allowing you to hold onto as much revenue as possible and continue growing your business by leveraging your profits. You and your lender will define your repayment timeframe together, and you can expect to pay only interest in monthly installments for a set period before you begin making principal payments later on. 

You may also choose to pursue a step-up structure loan. This flexible financing option is similar to revenue-based financing, and your payments increase as your revenue grows. This means payments can change from month to month. This option allows you to make smaller payments in the early stages of your growth, and scale up your repayment as your business scales, too. 

Debt Requires No Equity in Your Company

A vital distinction between debt and equity funding is that debt financing is a non-dilutive funding route. This means you won’t lose any shares when you enter a venture debt agreement. With every raise round for equity financing, you lose (or create) more shares in order to get the funds you need to spark growth. Debt equity provides valuable funding fast and enables you to maintain more ownership of your company and better control the allocation of shares as you desire. 

Some debt financing options operate using warrants. A warrant gives the lender the ability to purchase a portion of the SaaS company’s stock at a specific price, often lower than the standard rate for that share. Usually, limitations exist to restrict the number of shares the lender can purchase, but warrants do allow lenders to obtain shares of the company at any point in time. At River SaaS, we never require warrants. When you choose us as your lender, you can trust that we have no interest in taking ownership of your company and our venture debt agreement will reflect that. 

Better Together: Explore how venture debt funding makes your existing equity capital even stronger. 

Debt Funding Can be Used Flexibly

Your venture debt agreement will establish what you plan to use your funding for, but if your plan changes, debt funding is built to accommodate that with flexibility. For example, you may initially plan to spend the entirety of your debt capital investing in sales and marketing efforts, but find a few months into your growth plan that you need to hire new staff. Debt funding allows you to pivot your funding plan when necessary to accommodate your needs as they arise. 

Some lenders prohibit the use of capital for specific circumstances and reasons, which will be established in your venture debt agreement in the beginning. Some lenders like River SaaS even offer insight and support in developing a growth strategy best suited to your needs and ambitions, which can help you plan for the best way to use your funding so it makes maximum impact. 

River SaaS is the Right Partner for Your Venture Debt Agreement 

At River SaaS Capital, we help SaaS companies scale swiftly and sustainably with the non-dilutive funds they need. We prioritize partnership and work with you to achieve your unique goals and we tailor our funding to best suit your needs. With a range of venture debt financing options to choose from and the option to pursue equity funding with us later, we’re here to support you as you scale. 

We never ask for warrants or dilute your company by taking equity shares for venture debt financing, and our venture debt agreement reflects that. With River SaaS, you can push your business forward with our unique, flexible financing, helping you scale faster and meet your growth goals. Should you desire aid and insight into how to use your capital most effectively, we offer strategic growth planning resources to assist you. 

We’ve funded a wide range of SaaS companies and supported them as they scaled, and we’re eager to do the same for your business. Fill out the form below to contact our investment team and learn more about our venture debt financing process.