Gone are the days when the only source of growth capital was to sell equity to investors. In recent years, more options have become available for growth finance.
The growth of revenue-based finance provides options for SaaS founders to finance their business by using their revenue as collateral for a loan. These loan options are usually repaid with a percentage of monthly revenue at a set cost. As a result, SaaS companies can leverage recurring revenue with venture debt to grow their business without dilution of their equity held in the business. There are many options to choose from; however, the best ones are flexible for the business needs and come with no warrant, personal guarantees, or equity dilution.
Revenue-based financing takes shape in a variety of ways and structures, depending on the provider. We advise founders to choose the best fit for their business by matching the type of finance with how they need to use it. For example, short-term loans should be used to fund short-term growth or to smooth out working capital fluctuations. For longer-term needs such as building a sales or marketing team, a structure of 3 – 5 years is going to work better.
Several companies have effectively used growth finance for their initiatives, including clients of Element Finance. For example, Athletic Greens used it for inventory; Mural used it for refinancing an investor and growth cash flow; Chargify used it to grow their team members and invest in sales and marketing. The goal is to match the horizon of your project/investment to the cash flows require to fund the plan.
The advantages of debt financing are numerous.
1. Control: Lenders do not require the same level of control that an equity investor may want. Things such as voting rights, board seats and shareholder’s ability to veto all come with the risk of a divergence in the founder’s desired route for the company. Revenue-based finance avoids all this but might include some covenants which will require the business to operate in a certain manner.
2. No Strings attached: Once you pay the loan back, your relationship with the financier ends (presuming there are no warrants).
3. Shareholder Value: a loan gets repaid at a set cost, with the value created in the business staying with the shareholders.
4. Flexibility: Most lenders are prepared to grow the loan facilities available to founders, as their business grows.
5. Tax benefits: the interest you pay is tax-deductible.
If you would like to discuss revenue-based growth finance and how we can help, talk to us.