Alternative Financing Options for SaaS Companies

February 4, 2021

One of the most common things we hear from SaaS founders when they speak to us about alternative debt is: “I wish I knew about this type of financing sooner.”

Many SaaS founders have been operating under the status quo, pursuing “normal” equity fundraising activities. However, there are certain situations where it may be smart to consider options outside of traditional venture capital. In this article, we will be outlining three options for alternative financing for SaaS companies. 

Which Alternative Financing Sources Are Available to SaaS Companies?

Venture Debt

Venture debt is an attractive source of funding for both non-VC and VC-backed SaaS companies and is often be provided by banks specializing in venture lending and non-bank lenders. This form of alternative debt is generally structured as a warrant-backed term loan. Terms generally last 1-5 years with investment sizes ranging from $1-10 million. 

Read the Founder’s Guide to Venture Debt.

Revenue-Based Financing

Also known as revenue sharing or royalty-based financing, revenue-based financing is another form of alternative debt where investors inject growth capital in exchange for a percentage of monthly revenue. This is particularly useful to SaaS companies due to their sticky revenues and strong ability to scale. Terms typically range from 3-5 years. RBF is typically provided by non-bank lenders.

Read the Founder’s Guide to Revenue-Based Financing.

Working Capital Loans

Working capital loans are often provided by banks and trade finance providers. Loan sizes can start anywhere from $100K and are typically tied to the receivables and/or MRR of the company with terms lasting between 6-18 months.

Read more about Working Capital Loans.

What Are Their Typical Investment Criteria?

Venture Debt

Venture debt providers typically look for companies with significant assets or cash flows (ARR above $1 million), attractive growth rates, positive unit economics, and are close to or at operating profitability. While most venture debt lenders do focus on VC-backed companies, there are lenders (e.g. Flow Capital) that provide venture debt to non-VC-backed SaaS companies as well.

Revenue-Based Financing

Like venture debt, revenue-based financing lenders require companies to be post-revenue with positive unit economics. Most lenders will look for SaaS companies generating at least $1 million in ARR with strong plans for growth. 

Working Capital Loans

Similar to the above, prerequisites for receiving working capital loans involve significant working capital/cash flows and/or institutional equity investors on board. 

What Are the Typical Deal Terms?

Venture Debt

The maturity for venture debt loans typically lasts between 1-4 years. Some providers will allow balloon repayments, where interest payments are made during the contract term and the borrower repays the outstanding loan amount at maturity. Interest rates vary based on lenders, but can range anywhere from low-to-high teens. Venture debt providers often combine their loans with warrants, which offers lenders the option to convert a share of their loan (5-20%) into equity at the share price of the last equity financing round. These are typically exercised before an acquisition or IPO.

Revenue-Based Financing

Under revenue-based financing, monthly payments are based on a fixed percentage of monthly revenue. This percentage generally ranges from 1-5%, but can be as high as 8%. At the end of the term, borrowers are also required to pay a pre-determined multiple of the initial loan amount – typically referred to as a “repayment cap.” This can range from 1-3x. RBF loans may also come with warrants or equity kickers. 

While RBF loans are generally structured under fixed terms, typically lasting 1-5 years, Flow Capital provides a unique “unfixed term” option for founders looking for more control. Instead of a fixed term, the borrower decides when they would like to end/buy out the loan. This offers the company greater flexibility and can time the buy out according to the company’s performance.

Working Capital Loans

Working capital loans are typically provided as a revolving line of credit or as a current account, typically ranging between 8-12%. The investment is secured on your receivables and these agreements do not typically include any warrants or equity kickers. 

Which One Should I Use?

It is important to remember that all three financing structures mentioned above will require you to repay their loan/investment in cash. Therefore, you should only borrow from those sources if you have a clear path to profitability, are planning to secure a future round of financing, or are going to exit your company within the contract term.

Venture Debt

Venture debt is best suited for SaaS companies looking to extend cash runway, often to the next equity round or exit. Doing so reduces the company’s equity cash and increases debt cash, while enabling it to push out the next funding round to a later date. Alongside strong growth, the company’s pre-money valuation in the equity round will likely be higher than what it would have been had the company taken the round earlier. Here are the other uses of venture debt:

  • To extend cash runway to the next round of financing
  • To extend cash runway to profitability
  • To increase the company’s valuation ahead of the next equity financing round
  • To make one-time purchases, such as acquisitions or large equipment
  • To avoid an equity bridge or down round

Revenue-Based Financing

Similarly, revenue-based financing is best for SaaS companies looking to extend cash runway or fund long-term projects or acquisitions. RBF is also very useful when funding large capital expenditures, such as equipment purchases or acquisitions, since cash flows from those purchases can be used to repay the debt. Lastly, this is also a great option for SaaS companies looking for monthly payments that will fluctuate based on the natural ups and downs of the company.

Working Capital Loans

These are typically the cheapest source of financing for SaaS companies and are best suited to cover short-term cash needs. They can help overcome liquidity shortages and are not well suited to fund long-term projects or acquisitions. Some of these short-term cash needs include:

  • Buy inventory/equipment
  • Expand team
  • Meet seasonal demand
  • Marketing

What to Consider When Choosing a Lender?

Check with Existing Investors

Before anything, you should always double-check with your existing investors to make sure they are open to alternative sources of funding.

Calculate the Real Cost of Capital

Be sure to model out the real cost of capital associated with the loan to ensure you fully understand and can carefully compare all deal terms. Choose the term sheet that best reflects your current and future needs.

Track Record

Learn more about the alternative financing provider to uncover what else they can bring to the table. Are they supportive? Do they have domain-specific knowledge? Can they bring value-add to other parts of your business? Lastly, be sure to conduct research into how the provider has behaved in the past. Have they been open to restructuring loans when things did not go as planned? 

Summary: Alternative Financing for SaaS Companies

Venture Debt

  • Structure: Warrant-backed term loan
  • Typical Term Length: 1-5 years
  • Interest Rate: Low-to-high teens interest rate
  • Purpose: Extending cash runway, funding large purchases, or bridging the company to profitability

Revenue-Based Financing

  • Structure: Monthly payments based on a percentage of monthly revenue + buy out
  • Typical Term Length: 3-5 years
  • Interest Rate: 1-5% + repayment cap
  • Purpose: Extending cash runway, funding large purchases

Working Capital Loan

  • Structure: Revolving line of credit or current account
  • Typical Term Length: 6-18 months
  • Interest Rate: 8-12%
  • Purpose: Short-term cash needs

About Flow Capital

Flow Capital provides venture debt and revenue-based financing for scaling SaaS businesses. We offer fast funding with flexible terms that are tailored to meet your company’s unique current and future needs. 

To apply for financing, fill out our online application form here