What is SaaS Finance & Financing Options for Every Stage

April 20, 2021
What is SaaS Finance?

Table of Contents

A financial model for a SaaS company often relies on generating a recurring monthly revenue that increases with time.

While some companies grow faster than others, it’s important to keep income trickling in, which is where SaaS finance comes into play.

This term refers to financing options designed specifically for companies selling software-as-a-service. There are plenty of ways a SaaS company can raise money, but the options they have available will be limited by their Monthly Recurring Revenue (MRR)/Annual Recurring Revenue (ARR) and their overall business model.

In this piece, we’ll highlight the growth stages of a SaaS brand and the SaaS finance options available at each of those stages.

The Stages of Growing a SaaS Company

There are four main stages that need to happen for a SaaS business to reach its full growth potential:

  • First stage: this is the cash-intensive, research and development stage. There’s nothing to sell at this point apart from beta versions of the product that are often tested by early adopters.
  • Second stage: the product has been released at this stage, and companies start to encourage users to refer their wider networks to the software. Revenue starts to trickle in, but it doesn’t go far while building a user base. This stage is often the most costly and often relies on revenue-based financing.
  • Third stage: the software has a well-established user base at this point, and the company is tasked with leveraging growth and increasing revenue.
  • Fourth stage: the final stage offers a fork in the road for SaaS companies. Either they can exit via selling or merging the software, or they can focus on continued growth.

Financing Your SaaS Company

SaaS finance can be a huge concern for emerging brands. They are often bootstrapped at the start, and their month-to-month model makes it difficult to secure the usual funding available to businesses.

There are two main options at the start:

1. For smaller cash injections…

If the amount of capital required is small (up to 3x MRR), businesses can get a line of credit from a bank. These are cheap, relatively easy to access, and solve short-term cashflow problems.

While this is a great way to get a small cash injection quickly, it’s often not large enough to cover the high costs of acquiring a loyal user base at the second stage of growth.

2. For larger cash injections…

If the amount of capital required is more than 3x MRR, businesses can access a range of debt options from banks, revenue-based financing lenders, and venture debt lenders.

These are often only available to SaaS companies backed by an established VC. Those with angel or bootstrapped VC will find themselves more limited, and venture debt usually won’t be an option unless using a specific provider.

Read our Founder’s Guide to SaaS Financing here.

The 3 Stages of SaaS Finance

 

Check with Existing Investors

Unless a SaaS company really takes off from the get-go, founders need to find funding at the different stages of growth. Each stage requires a different amount or type of capital, and when a company reaches the next stage, they often unlock a new set of financing options.

Here’s what funding is available at each stage of the SaaS growth cycle:

First Stage Financing: Seed Stage VCs & Angels

At the start of their growth journey, SaaS companies have to lean on someone who believes in their vision. Initially, this is the founder and their network, but it can also be external help. Often, this external help comes in the form of an Angel or Seed stage VC fund for a quick cash injection.

It’s important for businesses to get backing early on, as this can make it much easier to secure financing later in the game.

Second Stage Financing: Series A

Series A funding is available to SaaS companies with a proven track record of generating consistent revenue. In order to secure this type of funding, new customers have to be added on a regular basis to gain the interest of institutional investors.

SaaS companies that are able to show a consistently increasing MRR or ARR are more likely to succeed in getting Series A funding.

Third Stage Financing: Series B and Beyond

When a SaaS company is established and ready to expand, it can unlock structured growth rounds of funding. This can only happen when the company has proven it can create user value and attract a significant number of customers over a certain time period.

At this point, successful companies can access a range of different SaaS financing options, including different types of investors like private equity companies, venture debt, and more specialized growth funds.

Alternative SaaS Finance Options

As well as bank lines and VC options, there are alternative funding methods available specifically for the SaaS model.

SR&ED Finance

It can be difficult to get debt finance beyond venture debt in more advanced rounds of growth, but companies that have invested a lot in research and development might be eligible for SR&ED finance.

This is essentially non-dilutive financing using federal and provincial research and development grants, such as SR&ED tax credits, BCIP, and IRAP funding as collateral.

We work closely with OKR Financial NA/OKR Financial UK to provide this option to SaaS companies.

Venture Debt

Debt is a cheaper form of growth capital for SaaS companies (unlike equity financing). Loans can be combined with equity financing to increase the capital available to a SaaS company and create another stream for a cash injection.

Between 2009 and 2020, late-stage venture loans grew more than 2.5x and exploded during that time by nearly $17 billion in annual revenue (PitchBook 2021).

However, most SaaS companies can only access venture debt if they are VC-backed. Flow Capital is one of the few SaaS growth financing companies that lets non-VC-backed companies secure venture debt, which is more flexible than bank debt and less expensive than venture capital.

Revenue-Based Financing

One of the best sources of alternative financing for SaaS companies is revenue-based financing (also known as revenue sharing) because it aligns directly with revenue growth. 

Revenue-based lenders are big fans of SaaS companies because of their recurring revenues, so SaaS companies should have no problem securing revenue-based financing as long as they meet the lender’s minimum MRR/ARR requirement and have strong traction and revenue projections.

SaaS Finance: Align with Revenue Growth

There are multiple stages in the growth cycle of a SaaS company, and each one requires a different level of cash investment. At the start, companies need quick, fast cash to kickstart their MRR before leveling up during the growth stage.

It’s important to have the interest of investors in the early stages, but this isn’t always mandatory in order to secure funding. There are plenty of alternative options for SaaS companies in the later stages of the growth cycle, including venture debt, revenue-based financing, and SR&ED finance.

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