Motivated SaaS leaders rely on strategic funding to fuel growth initiatives and enable sustainable scaling. With so many funding options on the market, it’s essential to evaluate the pros and cons of each choice and ensure your final decision is prepared to take you to the next level. Often, the choice can come down to pursuing equity financing or debt. Yet the unexpected truth is that equity is more expensive than debt in the long run due to its lack of accessibility, the hyper-competitive nature of the current equity deal landscape, and the hidden costs associated with it due to the risk investors take on.
Read on to learn more about how venture debt and equity stack up against one another and evaluate which is the right choice for you to fuel fast, flexible growth.
Understanding Debt vs Equity in the Current Landscape
Venture debt and equity financing have long been two of the most common financing mechanisms for SaaS companies, yet their contemporary deal landscapes differ in key ways.
Equity Financing
The equity market overall remains stalled as it has for previous quarters, showing a continued decline in deals. Though some deal activity improved for specific company types, such as companies seeking an exit, a mass of dry powder accounting for $1.1 trillion remains. These funds create an environment for hyper-competition as companies from all sectors compete to secure the deals that do occur.
Due to this, newer SaaS companies that don’t have the growth record to sway selective deal makers may suffer and find an equity deal is out of reach at this stage. Alternatively, equity deal recipients at any stage may have to sacrifice more equity shares than they want to secure the funds they need to grow with equity alone.
Debt Financing
Debt financing offers a fast and flexible alternative to equity. Through venture debt with the right lender, SaaS companies can pursue the financing they need at any stage of growth, from startups in need of initial support to long-established companies seeking a non-dilutive source to fund their next initiative. Its flexible and accessible nature makes it the perfect match for a wide range of SaaS companies.
With debt, borrowers can receive access to their financing more quickly than alternatives, equipping them with the swift resources they need to act strategically and fund their growth. Debt can also be tailored to your repayment preferences with the right lender, allowing you to choose between traditional loans, interest-only options, and step-up structures that shape the terms of your repayment. This allows you to maximize the returns of your investment while enjoying enhanced flexibility with your lender.
Due to the stalled deal market for equity and its effects, venture debt comes out on top in terms of its flexibility and accessibility. For many, it can also come out on top in terms of cost.
Equity is More Expensive Than Debt — Here’s Why
With debt, borrowers must repay the financing they’re given, whereas equity requires the offering of company shares. Over the long term, the impacts of this choice can be significant in its overall cost and your growth.
Venture debt allows you to grow faster because the deals are more attainable and the financing is more accessible. Speed to impact is critical to position your organization for swift, sustainable growth, and debt financing allows you to act more quickly to enact growth initiatives when they matter most: right now. As more opportunities emerge for SaaS companies to grow within certain verticals or appeal to a wider audience with feature upgrades like AI, the ability to be nimble with your financing and efforts will allow you to beat your competitors and set a foundation for your long-term success that far outweighs the initial costs of debt financing.
Equity financing doesn’t carry these same benefits. It’s more difficult to obtain a deal, which can delay your ability to make progress and begin cementing yourself in the market. During opportune times, waiting to secure an equity deal before you can fund your growth initiatives can cause you to fall behind the competition. The current landscape of this financing option may also result in you sacrificing larger amounts of equity to secure a deal.
There’s also a hidden cost to equity — because investors take on higher risk in these deals than in debt, there’s an expectation for higher rates of return. These combined cost factors result in a more expensive financing option that fails to offer the same speed or flexibility as debt.
Choose River SaaS for Strategic Venture Debt to Spark Your Scaling
At River SaaS, we’re dedicated to supporting the growth of motivated SaaS companies with tailored financing options designed with your needs in mind. Our venture debt is offered in formats with and without warrants, and we tailor our repayment structures to match your needs. Whether you’re seeking interest-only options that allow you to reinvest more of your earnings by paying only interest for a set period, or you want a step-up structure that scales as you scale, we’re here to help. We’ve supported some of the brightest SaaS minds with our financing and growth insights, and we’re motivated to help you succeed.
Talk to us today to learn more about our debt options and how you can support your scaling with our strategic financing.
