The most successful SaaS businesses are moving away from historical analysis to a more proactive, forecast-based approach. With this in mind, exploring your SaaS company’s finance options plays an important role in planning ahead and knowing where your revenue, expenses, and cash flow are going over time.
Venture debt has emerged as a popular financing option for scaling B2B SaaS companies as it can help mature startups grow while minimizing equity dilution.
In this piece, we’ll cover exactly what venture debt financing is, who it’s best suited to, and what you can expect if you choose this funding model.
Venture debt financing is a form of debt financing for high-growth, asset-light companies. It’s a great option for SaaS companies with strong cash flows and a clear path to profitability.
While some lenders do require VC sponsorship to secure venture debt financing, some lenders like Flow Capital are open to non-VC and VC-backed companies.
According to reports, venture debt makes up about 10% of the venture market, and that percentage is growing every year. Typical loans that fall under this category range anywhere from $500K to $30M, depending on the company’s size and lifecycle stage. Repayment comes in the form of principal repayment, monthly interest payments, and warrants.
Venture debt financing offers a company additional capital in the form of debt. This helps reduce the amount of dilution founders face when they are starting out.
In many instances, founders have given away a percentage of their business to investors during seed rounds and Series A rounds of funding, but they may still need additional capital to buy equipment, run ad campaigns, or create other assets for growth.
Rather than dilute more, they can add venture debt to their raise, which saves dilution for a future Series B round of funding.
Venture debt is typically structured as a traditional term loan with fixed monthly interest payments over 1-3 years. Some lenders, like Flow Capital, offer flexible structures that are tailored to meet the unique needs of each company.
Let’s outline what this might look like in action.
Say, for example, a SaaS company raised $500K at a $2M valuation in a seed round of funding. Then they raised a further $8M with a $20M valuation through a Series A round of funding. As a venture debt loan usually falls somewhere around 30%, this would give the company $2.4M in venture debt, bringing the total Series A raise to $10.4M.
Choosing the kind of loan that best suits your SaaS business isn’t easy when there are a lot of options available. However, if you find yourself in any of the following positions, venture debt financing could be a great option:
For Elliot Bohn, CEO of CardCash, it was the need to buy more inventory for a busy season that pushed him in the direction of venture debt financing. “We wanted to make sure that CardCash had the capital needed to buy enough inventory for the holiday season. But raising more venture capital in this scenario didn’t make sense,” he says, adding that he wanted to maintain control over strategy and operations. “Giving up equity to capitalize on a short-term opportunity, one that could be funded just as easily with debt, is a shoddy way to run business.”
Revenue-based financing is also available to both VC-backed and non-VC-backed B2B SaaS companies. It’s essentially a form of flexible financing where payments are based on a percentage of monthly revenue.
This means it’s great for scaling SaaS companies because payments match the natural ups and downs of the company as it grows. However, the costs are often higher than bank loans, but are less expensive than an additional equity round.
Companies that benefit from revenue-based financing include those with varying growth rates, those that are close to or at profitability, and those that are pre, post, or anti-VC. Since no equity is required, founders that choose this financing model can choose to run their company under controlled growth rates and still have secure growth capital.
Read our in-depth Founder’s Guide to Revenue-Based Financing here to learn more.
Again, monthly recurring revenue (MRR)-based credit facilities are available to both VC-backed and non-VC-backed B2B SaaS companies. It’s a funding method typically sought out in lieu of a small equity round and, while costs are often higher than bank loans, they are less expensive than revenue-based loans. Often, they fall into the same ballpark as venture debt terms.
This type of financing is only available to businesses with a SaaS model and those which are of a significant scale – usually, companies need to be bringing in more than $3M in ARR to qualify.
Financing your SaaS brand is of great importance, especially if you’re on a heavy growth trajectory. Planning ahead and knowing where you’re going to secure funding from to meet growth goals, maintain revenue, and generate cash flow is crucial to success.
Venture debt financing allows you to continue to grow your B2B SaaS brand without running multiple small equity rounds that hand over control to investors. Through this funding model, you can continue to secure growth capital while maintaining operational control in your journey to profitability.
