Why is Debt Cheaper Than Equity?

More and More SaaS Companies are Exploring Debt Financing, and For Good Reason

why is debt cheaper than equity

Whereas most of 2021 saw SaaS companies receiving strong valuations and going public at significantly higher multiples (thanks to insatiable demand for innovation and digital transformation after the pandemic), 2022 was a different story. Now, SaaS companies that once relied or expected to rely on venture capital have had to change gears. Here, we’ll explore why debt is cheaper than equity today and why it’s become a more appealing option for founders and leaders looking to take their businesses to the next level.

First and Foremost, Venture Debt is More Available Than Equity

When the market started to shift early in 2021 — for a variety of macroeconomic reasons that you’re likely already well aware of and don’t need to be re-explored here — the result was that venture capital firms and angel investors became vastly more cautious. They were no longer willing to invest as much, nor were they willing to invest as quickly (in multiple cases, investors were making commitments after just an initial call!). Rather than focusing on new deals, they instructed portfolio companies to become more resilient.

And this is one of the reasons why debt is cheaper than equity — especially for the road ahead. While deals are still happening, venture capital firms are being more conservative in their approach and requirements — all of which has a cost. As we’ll detail shortly, the amount of time and resources needed to secure equity-based funding can be significant, whereas debt typically requires less. Thus, greater access to debt will result in SaaS companies that are looking to grow in 2023 expending less of their existing resources.

Go deeper: How Debt Addresses Growth Challenges of SaaS Companies Today

Debt Takes Less Time to Close

This is due to a couple of key reasons. First, the venture debt due diligence process between application and closing typically concludes in a few weeks to a few months. This is much faster than the several months or even a year or more needed to wrap up an equity deal. Less time means faster access to capital and greater speed to impact in using that capital for growth. Additionally, the legal reviews associated with equity can be extensive. This results in higher legal fees, more time spent burning existing capital, and less opportunity to strengthen revenue by using the capital for growth. 

As one SaaS company put it, “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.”

More than speed: Learn other reasons why debt makes sense for growth today.

Debt Bridges Gaps SaaS Companies are Likely to Have Today

Another key reason why debt is cheaper than equity revolves around what it helps to offset. With equity and other investment options less available or more difficult to obtain, SaaS companies may have to use more of their existing resources. With an increased risk of customers churning due to economic concerns, things could get worrisome for younger SaaS companies in 2023.

Venture debt capital can help SaaS companies navigate the months ahead (or potentially longer depending on how things go in the new year) with confidence. Capital from a debt deal can be used to offset customer churn and burn rates while providing resources to start bringing new revenue into the business. Additionally, venture debt can be used to bolster customer success — a critical avenue for retaining customers and preserving existing revenue.

The cash must flow: Learn how venture debt helps improve cash flow.

These Are Just a Few of the Reasons Why Debt is Cheaper Than Equity

And there are countless more. At River SaaS Capital, we’ve been partnering with SaaS companies to help them achieve their growth goals. With flexible qualification criteria, a variety of structures that empower you to grow your own way, no requirement for warrants, and a long-term partnership approach, there’s no better venture debt lender to work with to make your growth strategy a success. 

We’ll help you understand the options available to you, help you map out a plan for growth in 2023, and then let you take the reins. You know your business better than anyone else, and we won’t get in the way of your chosen direction (including not taking a board seat!). We’re here to support you and make your vision for your SaaS business a reality. Get in touch with our team below to learn more about our venture debt financing solutions.