Revenue-based financing and similar structures can appeal to SaaS companies seeking venture debt financing plans that scale as they scale. With revenue-based financing and similar structures, payments begin smaller and grow as the borrower’s earnings grow, tailoring the repayment to their growth stage. This offers a variety of advantages in its flexibility and speed of impact but can make it difficult to predict how payments will change from month to month.
For brokers, CPAs, and other interested parties helping SaaS clients find the right funding, understanding the advantages and potential drawbacks of revenue-based financing — and the more strategic variation to consider — is key. Learn more about this financing choice and how to unlock its potential below.
Exploring Revenue-Based Financing
Revenue-based financing is a structure of venture debt that is influenced by the revenue of the borrowing company. This loan is repaid based on a percentage of the borrower’s monthly revenue and payments are not fixed, so costs will fluctuate from month to month based on revenue performance. This can offer many benefits to companies in their early stages, as payments will be smaller when revenue is smaller to allow more money to be reinvested into the business to accelerate growth. On the flip side, higher revenue will result in higher payments, which can allow you to pay off the debt faster.
This tailored approach can be a strategic choice that offers many benefits, including:
Flexibility
With revenue-based financing and similar structures, the cost of capital is ever-shifting and adapts to the borrower’s growth. This allows for enhanced flexibility in the repayment structure and early-stage obligations, allowing your clients to stay focused on scaling without requiring a large monthly payment for their loan.
Speed to Impact
Because SaaS revenue-based financing allows for a growth-focused approach, it can carry a greater speed to impact. When payments are small in the beginning, companies can reinvest more of their earnings to accelerate their scaling and set a foundation for success.
Start-up Friendly
Not every financing mechanism for SaaS companies is designed to support those at the earliest stages, but structures designed to grow with the company can be an ideal match. This option is designed to evolve and offers more tailored support and faster funding than other selections, like equity.
What’s the Drawback of SaaS Revenue-Based Financing, and How Can It Be Solved?
One potential drawback to SaaS revenue-based financing comes down the line, as revenue expands. When this happens, payments expand too, which can reduce the amount of capital a company has to dedicate to its growth. As the needs of your clients evolve, this may make it difficult to dedicate enough resources to high-priority growth initiatives when the opportunity is prime. This can also make forecasting and budgeting more difficult, as your clients won’t know what to expect for their payment plan in the year ahead without knowing the exact specifications of their revenue from month to month.
At River SaaS Capital, this is solved with a strategic shift: the step-up structure. With step-up style venture debt, borrowers can still enjoy smaller payments that scale as they scale, but the payment terms will be defined at the beginning of the engagement. This allows for heightened transparency at every stage and ensures your clients can better plan their budgets and avoid risking cash-strapped months due to unexpected payment increases. The step-up structure combines the benefits of revenue-based financing with the necessary clarity to promote the best results.
Enjoy More Strategic SaaS Revenue-Based Financing with River SaaS Capital
At River SaaS Capital, we understand the common growth hurdles for SaaS companies and we’ve designed our funding options to address that. Our venture debt is fast and flexible, allowing your clients to access essential financing sooner so they can put it into action now, not later. We offer options with and without warrants and we tailor our repayment structures to best serve our borrowers, including traditional loans, interest-only options, and step-up structures.
For those interested in the benefits of revenue-based financing, our step-up structure is the perfect solution to enjoy financing that grows with your clients without being unpredictable like its alternative. We ensure full transparency on the payment terms at the beginning of the engagement so our borrowers know exactly what to expect at every stage. This allows for better forecasting and budgeting and helps your clients fuel their growth with clarity on how their growth resources might shift each month.
In addition to strategic and tailored financing options, we offer GtM strategies and growth insights for companies of all stages. We’re proud to have supported a diverse group of SaaS companies with our funding, and we’re here to help you and your clients grow too. Contact us today to learn more about our more strategic SaaS revenue-based financing option and find out if we’re the right fit.
