How Venture Debt and Equity Financing Can Work Together

A Quick Recap of Debt and Equity Financing

debt and equity financingIf you’ve explored your options for growth funding, you’ve probably read quite a bit about venture capital, bank loans, angel investors, and venture debt. Each of these offers certain advantages, and some work better for certain business types than others.

With venture capital and angel investors, you can obtain a large amount of capital and gain access to contacts that you otherwise might not have been able to make. However, you have to give up a portion of the equity in your company. With bank loans, you can gain funding on acceptable terms. However, you’ll need to have hard assets to qualify.

For SaaS companies, venture debt is often a great first step because it’s simply a loan. You don’t have to give up equity or a seat on your board to get capital, which makes it a non-dilutive form of funding. You retain complete ownership of and control over your business and its direction. You also don’t need to have the hard assets required for bank loans.

But at some point, an opportunity or need may arise for you to explore other forms of funding beyond debt. There are a number of reasons and strategic uses for this. Let’s take a look at a few examples of how debt and equity financing can work together.

Debt: Your Growth Accelerator

If you’re an early stage SaaS company, venture debt is an extremely attractive option. You stay in control and don’t have to answer to a third party as to why you’re moving in a certain direction, hiring a certain person, or making changes to your platform. Sure, there’s are monthly cashflow commitments, but lenders are typically able to structure the loan in ways that keep payments manageable. Some loan structures even allow you to pay less interest over the life of the loan.

Despite debt’s flexibility, there are limitations. Most loans are based on a multiple of monthly recurring revenue (MRR) and funding beyond that multiple may be:

  1. Unavailable – many lenders view debt beyond a certain threshold as too risky to continue supporting; and/or
  2. Unsustainable – principal and interest payments may become too large for you to service (repay) comfortably

Because of this, debt is often used as a growth accelerator or a bridge between two points: if you have the room on your balance sheet, are valued at X and want to achieve Y by a certain timeframe, debt could provide the growth capital you need to fund acceleration efforts via marketing and new sales staff.

Again, venture debt is meant to help you grow rapidly more than it’s meant to help you sustain operations. It can be used to extend your runway, but as your company grows and evolves, you may require funding beyond the capabilities of even the most flexible lenders. That’s why debt is often the first step in a SaaS company’s funding journey. Use it to accelerate growth, and when you’re ready for that next step, consider equity.

Equity: Your Operational Sustainer

Equity-based financing becomes a strategic option later on in your growth journey. 

One example includes extensive product development. Perhaps the first iteration of your platform has plateaued in some way, and your customers have been wanting more. To build new functionality requires knowledgeable developers, and skilled talent in this area is not inexpensive. And you’ll likely need more than one.

Perhaps you want to pilot a new feature, launch your platform in a new market, or even explore a new customer segment. Again, many of these initiatives requires funding beyond the capabilities of venture debt. 

Good News — You Can Have Debt and Equity Financing Together

River SaaS Capital is pleased to announce the expansion of its financing capabilities to include equity-based solutions. This offering complements our existing revenue-based debt solutions for Software-as-a-Service (SaaS) companies located in the U.S., providing companies with strategic financing options that match their current growth status and their future goals.

While River SaaS will continue to structure initial funds as 36- or 48-month non-dilutive term loans, we pride ourselves on our ability to grow with our portfolio companies over time, with the ability to lend up to $4M of either debt or equity to established borrowers.

Both debt and equity financing can be used at the same time, too. While you may obtain venture debt capital first, you can still obtain equity financing later on even if your current debt package is still in use. And because our debt solution provides exceptional flexibility through the use of tranches, flexible repayment options, and other alternatives, there’s no requirement to satisfy your debt obligation prior to obtaining equity. It remains a strategic growth capital tool that you can use as needed.

If you’ve been considering your financing options and are interested in equity (or how debt and equity financing can work together), we’d love to hear from you. We are actively looking to invest in companies that resemble our current criteria for venture debt with an MRR of at least $150k.

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