Why Debt Financing? Why Not Equity?
Despite the fact that obtaining equity is becoming more and more difficult, your SaaS business still has strategic financial goals to hit. While equity was the ticket to achieving that growth in recent years, greater focus has been placed on the advantages of venture debt financing. (See this year’s industry report for a deep dive into that.) When to use debt financing is an important consideration, as it can serve a number of purposes — from accelerating growth to protecting existing financial runways.
Here, we’ll explore when to use debt financing in a few common situations — while also sharing additional resources to help you determine if debt financing is the right solution for your business.
Three Scenarios When It Makes Sense to Use Debt Financing
1. When You’re Ready to Scale Up
The decision to accelerate growth to reach the next level is one of the most common examples of when to use debt financing. With more and more companies leaning on their tech stacks, the opportunity for SaaS companies to harness this momentum and grow remains despite increased economic concerns. Unfortunately, equity-based funding solutions can take several months or even a year-plus to close — putting companies that go that route purely for growth purposes behind schedule.
Why venture debt makes sense here:
- Debt can close in several weeks to just a few months
- The cost of this capital solution is less than equity
- Venture debt may not require assets, whereas bank loans do
- Debt is ideal for growth-focused sales and marketing activities
2. When You Need to Extend Your Runway
It’s been a tricky past several months in the SaaS industry. With less access to capital, businesses might find themselves operating on a limited cash runway. Additionally, any SaaS business that is experiencing a higher churn rate today may find that runway growing shorter — faster. Speed once again matters here, as companies will need capital to continue building their platforms, engaging the best talent possible, and navigating the myriad other financial and operational responsibilities of running a SaaS business.
Why venture debt makes sense here:
- Debt is designed to maximize speed to impact and produce results faster
- Depending on the lender, you can use the capital however you want
- You can use the capital to offset churn and burn ahead of a raise round
- Debt works well with equity structures that are already in place
3. When You Need to Achieve Specific Goals
One of the key differentiators between equity funding and debt financing is freedom. Whereas equity funding will come with an investor that has a stake in your business and thus a say in day-to-day operations, the right debt financing lender will serve as a partner rather than a decision-maker. They’ll provide the same level of support and guidance as an equity investor, but you’ll remain in complete control. So, whether you need to use the capital to accelerate growth, buy out existing equity shareholders, expand your team, or for some other reason, all that’s needed upfront is a conversation with your lender.
Why venture debt makes sense here:
- Venture debt is non-dilutive, so you retain 100% ownership
- You don’t have to give up a seat on your board to obtain venture debt
- Some lenders don’t require warrants, enabling even greater flexibility
- Depending on the lender, performance-based covenants may be required
Whatever Your Goals, River SaaS Capital is Here to Help You Achieve Them
We offer one of the most flexible venture debt financing options available for SaaS businesses. Whereas other lenders require warrants, extensive assets, or other criteria in order to qualify for their funding, River SaaS believes in your potential and ability to execute. You know your business better than anyone else, which is why we don’t get in the way. We simply provide the best venture debt financing solution based on your growth plan and provide the support you need — whenever you need it — to get to the finish line.Learn more about our funding solutions, including equity-based financing that is an ideal complement to existing debt financing relationships, and the companies we’ve empowered to achieve their goals. When you’re ready, get in touch with us below.
