The landscape of SaaS financing has changed significantly over the last several years. As the SaaS sector steadily recovers from the economic downturn, companies are looking for ways to grow, scale, and cover crucial operational and product development costs. At one point, VC was the obvious choice, but with fewer operating VC firms than ever, the bar for funding is higher – often impossible for smaller companies in particular to meet.
With growth and liquidity in the spotlight, businesses must take the necessary steps to ensure that their balance sheet is strong. This allows startups to continue investing in growth while negotiating the strongest terms and ensuring that dilution, valuations, and terms are fair. A strong balance sheet also empowers a company to walk away from a bad deal, with the confidence that a better funding option will be available to them.
With the changing funding landscape, we’re seeing that VC funding is down 35% YoY since the initial major decline in 2022. At the same time, funding alternatives such as Revenue-Based Financing are seeing an uptick, especially across Europe.
As companies shift focus to reaching profitability, extending their runway, and planning for a sustainable long-term future, alternatives to traditional VC are gaining popularity. Today, we’ll explore a few of the most popular alternative funding avenues, weigh their pros and cons, and offer recommendations for the funding avenue that could work best for your growing B2B SaaS company.
Venture Debt
Venture debt funding is typically available to newer high-growth companies with VC backing. It’s a strong choice to help extend runway without dilution and can offer lower interest rates compared to other funding options. At the same time, secured debt can be risky to carry..
Pros
- Less dilutive than some other funding options
- Can extend runway enough to attract future investors
- Can offer lower interest rates
Cons
- Strict repayment requirements
- Compliance costs (lawyers, etc.)
- Can come with restrictive covenants
- Can be high-risk for leaders
Private Equity
Private equity provides funding by offering investors shares in a company that is not publicly traded. Investors then have the opportunity to be active players in shaping the company's future to help the organization reach profitability. If your investors share your vision for the company's future, it can be the start of a strong partnership, but if your investors have a lower tolerance for risk or envision a different future, it can cause friction.
Pros
- High-risk, high-reward investments
- Investors can become strategic partners
Cons
- Requires dilution of ownership and control
- Investors could push the company's future in unwanted directions
Bank Loans
Bank loans are a tried-and-true method of securing financing for a growing SaaS company. With a traditional, predictable structure and repayment schedule, they can be a good choice if you’re looking for a reliable source of funding that comes with no surprises. Conversely, bank loans often fall short of the amount B2B SaaS companies typically seek to help power growth.
Pros
- Straightforward to secure
- Predictable repayment schedule and rates
- Non-dilutive
Cons
- Interest rates can be high
- Much longer process than other funding options
- Lack of flexibility makes it difficult to respond to your changing needs
- Most banks are not well-versed on SaaS models
- May not have adequate amounts of funding available
Non-Dilutive Revenue-Based Financing (RBF)
Revenue-based financing is a non-dilutive funding option based on predicted future revenue. RBF models vary from provider to provider, but many companies offer a percentage of future revenue in exchange for funding in the present.
A funding partner such as Capchase advances a portion of your predicted revenue, allowing your B2B SaaS company to invest in essential growth-led initiatives including marketing, hiring, events, and operational costs. RBF is a strong choice for companies looking to grow, scale, and chart a long-term, sustainable path for the future.
Pros
- Non-dilutive model keeps ownership 100% with you
- Funding is available fast
- No covenants or high interest rates
- Flexible funding can meet your needs
- Unsecured debt carries less personal risk
Cons
- You need revenue to base predictions on – RBF is not suitable for brand-new companies
- Amounts available are typically smaller than VC investments
The future of B2B SaaS financing
The trends speak for themselves: the era of unicorn after unicorn appearing on the B2B SaaS scene has come to an end, and in turn, today’s average B2B SaaS companies are looking for sustainability and predictable funding avenues. With a shift in focus from the flashy to the more predictable, options such as venture debt, private equity, bank loans, and revenue-based financing are more accessible.
As we outlined today, each funding method has pros and cons, depending on whether you value the amount of money available, ease of securing funding, dilutive elements, and covenants more than other factors.
How much funding are you eligible for?
Since revenue-based financing is based on your predicted future revenue, it can be simple to determine how much funding your B2B SaaS company would qualify for.
Visit the Capchase Grow calculator to get an estimate, and then reach out to a member of our team to discuss your options.
