Hey it’s Ryan Allis at SaasRise, the mastermind community for SaaS CEOs & Founders with $1M-$100M in ARR. Happy New Year!

Today we have a new deep-dive into non-dilutive SaaS financing for you. If you’re considering taking on debt for your SaaS firm now or in the future, read this article first.

The Definitive Guide to Non-Dilutive SaaS Growth Capital: The Six Types of Debt by Ryan Allis

In this article, we’re doing a deep dive into raising non-dilutive debt capital for SaaS firms. We explore the players, interest rates, terms, and types of capital.

If you’re considering taking on non-dilutive growth capital for your firm, be sure to read this article first. It will help you decide on what type of debt to take (revenue based, term loan, interest only-loan, venture debt, credit lines, etc.) and help you decide who to take it from. 

In our weekly SaaS CEO masterminds, our members often talk about raising equity capital and non-dilutive debt capital to invest in positive unit economics Sales & Marketing, product development, or accretive M&A opportunities.  Generally speaking, there are three types of growth capital for SaaS firms:

1. Customer revenue (the best kind by far) - Both non-dilutive and accretive to enterprise value, especially if it is recurring. You can generate additional customer revenue through offering annual prepay discounts (10-20% is the norm) and by following the SaasRise guides to ramping up sales & marketing within your CAC targets.
   

2. Equity capital (convertible notes, SAFEs, Series A/B/C/D/E equity sales, IPOs) - you don’t have to pay it back, but it’s usually expensive in that you give up a portion of your company ownership and voting rights to receive it.
   

3. Debt capital (non-dilutive, pay back either on fixed schedule or a % of revenue) - doesn’t dilute your ownership in the company, but you have to pay it back with interest

For this article, we’re doing a deep dive into #3 – debt capital. Let’s jump in…

The Major Players in SaaS Non-Dilutive Capital

Here is a high level visual overview of the players in the SaaS debt space. If we’ve missed any key players, feel free to let me know by replying to this email. We welcome reader comments!

Overall, we recommend FounderPath for non-dilutive SaaS financing. Here’s a good case study on FounderPath.

The Six Types of Non-Dilutive SaaS Capital

Within the category of debt capital, there are six major types: revenue financing, term loans, interest-only loans, credit lines, asset-backed loans, and venture debt.

Here is a brief overview of each type of SaaS debt:

1. Revenue-Based Financing (RBF) - Firms that give you capital upfront based on a multiple of your MRR and then get paid back over time as a percentage of revenue. This is sometimes done as invoice factoring and sometimes done as a merchant cash advance, but it’s effectively the same thing.
   

2. Traditional term installment loans - Traditional business loans from banks with interest and principal payments over a fixed length term. Generally you won’t qualify for bank loans unless you have collateral or net profits.
   

3. Interest-only term loans - Some SaaS lenders like Timia, River SaaS, Espresso, and Coho Growth capital offer 2-3 year interest-only loans that can later be amortized after a successful venture round (paid back in full with principal and interest) or start out as interest-only for the first 12-36 months.
   

4. Credit lines - A loan with interest that can be drawn down as needed and paid back as needed, without prepayment penalties, only paying for what you use.
   

5. Asset backed loans - Loans secured by assets such as real estate, equipment, or hardware. These loans usually have a lower interest rate than unsecured loans as they are a bit safer for the lender as the property securing the loan can be repossessed if necessary.

6. Venture debt - A loan that comes after an equity investment from a venture capital firm, usually with warrants that allow the lender to purchase equity at a low price in addition to getting their original capital back with interest. This is only available to venture-backed companies. Players here include WTI, Montage, Boathouse, and SaaS Capital. You’re getting cheaper cost debt in exchange for a little bit of low cost equity via warrants.

The Most Important Debt Terms to Consider

As you review your options and get various proposals, the most important elements to consider are:

• Term (Payback over 12 months is a lot different than payback over 36 months)

• Interest rate (use this calculator to convert every offer to an effective annual interest rate)

• Deferral of principal (can the loan be interest-only for a time? See below for firms who do this)

• Warrants (does the firm have to give out equity or an option? Sometimes part of venture debt).

• Covenants (what does the firm require you to do in order to stay out of default?). Watch out for liquidity covenants that require a certain amount of money in the bank or growth covenants that require a certain revenue growth rate.

• Use of proceeds restrictions (some firms limit capital usage to Sales & Marketing)

• Personal guarantee (not usually required, though sometimes this can reduce the interest rate if you do wish to offer one).

• Ability to refinance - What happens if you want to pay off the loan early? Do you still have to pay the interest for the entire term? Is there a prepayment penalty?

Now let’s take a deeper look at some of the most common forms of non-dilutive financing for SaaS firms – and the biggest players within each sector.

Revenue-Based Financing

Within the SaaS debt capital space, there is revenue-based financing, traditional term loans, credit lines, and venture debt. Let’s look at revenue based financing first.

You can apply for revenue-based debt capital from a firm like FounderPath, CapChase, Lighter Capital, Arc, Uncapped, Pipe, or Stripe Capital and often get approved within less than a week for 4x-10x your MRR in debt capital – for loans that are designed to be paid back within 6 months to 36 months as a percentage of your revenue.

These types of firms usually will offer revenue-based loans between $10,000 and $10 million depending on your annual recurring revenues, churn, and growth rate.

You would only want to take this capital if the expected return on your capital outweighs the annual cost of this capital (which is often 15-25% per year). These firms connect directly to your Stripe or merchant processing account to be able to tell you within 24 hours how much capital they can offer you and at what terms.

So if you find that your customer acquisition unit economics are positive  (LTV is more than 4x-6x CAC, payback is 12 months or less) and you want to ramp up revenue growth that would be profitable in year 2, 3, 4, 5, etc. – then it could make a lot of sense to take on the capital for faster growth. 

If for example for every $1000 you spend on Sales & Marketing your business generates $6000 in revenue over the lifetime of the customer (a healthy 6:1 LTV/CAC ratio), then you’d want to invest further and speed up growth – either through dilutive equity capital or non-dilutive debt capital.

What if you’re still small? Well, the firms that will work with <$500k ARR firms include FounderPath, CapChase, LighterCapital, Uncapped, Pipe, and Stripe Capital. 

Term Loans & Interest-Only Loans

There are also specialty debt providers which provide term loans and sometimes interest-only loans with a deferred principal payment.

These firms include Coho Growth Capital, Timia Capital, River SaaS Capital, Hum Capital, Element Finance, Metropolitan Partners, SG Credit, Espresso Capital, Bigfoot Capital, and Partners for Growth.

Traditional Banks Who Specialize in SaaS Banking & Lending

The firms with the lowest cost of capital are usually banks – since they can access the Fed Funds rate (5.33% as of Jan 2024) rather than have to pay other capital providers an even higher return. 

So if you can get approved by the banks (you’ll need to be on the larger side, likely above $3M ARR and profitable or close to profitable with positive unit economics) then you’ll be able to access the lowest cost capital.

Live Oak Bank, Comerica Bank, and Susser Bank are specialty SaaS-focused banks that will both bank you as well as participate in SaaS lending at around 12%-15% interest rates (and even lower if you provide a personal guarantee or can collateralize the loan with an asset).

For your SaaS banking and treasury management needs you can also use Mercury (which uses Choice Financial Group and Evolve Bank & Trust as its banking partners) or Arc (which uses Goldman Sachs Bank and Evolve Bank & Trust as its banking partners), which as of writing pays 5.35% on capital held in treasury accounts and diversifies across many accounts to allow for up to $5.5M in FDIC protection. 

If you are already profitable, you can also get an SBA loan (which tend to be at attractively low interest rates) from some of these banks.

SaaS Venture Debt Providers

Venture debt is a loan that comes along with (or after) an equity investment from a venture capital firm, usually with warrants that allow the lender to purchase equity at a low price in addition to getting their original capital back with interest. This is only available to venture capital backed companies. Players here include WTI, Montage, Boathouse, SaaS Capital, Mercury, North Atlantic Capital, Lighter Capital, Espresso, Hum, Element Finance, Arc, and Runway Growth Capital. Most venture capital firms have their preferred venture debt providers that they frequently work with.

With venture debt, you’re getting cheaper cost debt in exchange for a little bit of equity via warrants (rights to buy your stock, often for a very low cost). You can use venture debt to extend your runway without much further dilution. 

As always with capital it is much easier to get it when you don’t need it… so the time to get the venture debt lined up is right after you close, not when you’re almost out of capital. 

It’s worth nothing that Lighter Capital, Element, Hum, and Montage all will consider debt deals without requiring a venture capital investor.

There are also a few banks who provide venture debt including: First Citizens Bank (previously Silicon Valley Bank before acquisition), First Republic Bank, Pacific Western Bank (Square 1 Bank), and Bridge Bank.

Uses of Capital

What are the common uses of capital once it is raised? Anything you believe will increase revenue profitably – especially unit economic positive sales and marketing, R&D hiring, or even acquiring smaller competitors. 

Yes, you could even take on a SBA loan for M&A purposes to acquire a SaaS competitor (something Live Oak and Metropolitan Partners specialize in). Though for larger deals (>$20M enterprise value), you may want to involve a PE firm for both their expertise and ability to help you architect a future exit of the combined firms.

You should avoid any capital where the cost of capital is higher than the expected return from taking that capital. Some of the revenue-based financing, merchant cash advances, and invoice factoring can often be expensive – around 30-40% per year when you do the math.

So if you’re looking at a proposal for $250,000 in short-term revenue financing capital at just 10% per quarter, paying back $275,000 in 90 days, realize the actual cost of that capital is closer to 40% annually – and stay far away from it unless there’s no lower cost capital available and you have a very high return on capital investments.

Here’s a handy annual interest calculator to use to calculate the actual interest rate you’re getting charged.

Using the calculator above, convert all loans into an APR so you can actually see what the cost of capital is. Annual Percentage Rate (APR) is the interest charged for borrowing that represents the actual yearly cost of the loan expressed as a percentage. If they charge you 10% of the invoice to get your capital on average 60 days sooner, then it’s actually more like a 60% annualized cost of capital and you’d be better off just taking down a loan from a cheaper capital provider.

Some of the revenue-based lending providers may say “there is no interest rate since this isn’t debt” on their website – but this simply isn’t true. Anything that has to be paid back is by definition debt, and you can be sure they are internally calculating how much they are earning per year on the capital they deploy. 

Is Debt for You?

If you have proven unit economics ($1 into S&M consistently turns into $5+ in LTV for example), then it’s generally a good idea to take on debt to scale up your Sales & Marketing and ARR. This will not only be non-dilutive, but it will be accretive if the return from the investment in S&M is greater than the cost of capital.

At the end of the day, SaaS firms get acquired successfully due to great technology, great UI/UX, and great growth. Smart debt can be a pathway to all three.

If you don’t yet have a proven S&M engine (where money in = much more money out), then focus some time on first creating and testing that engine before you take on either venture capital or debt capital to invest into it. If you’re at $1M+ in ARR, join our SaasRise CEO mastermind community and we’ll all help each other grow.

Overall, we recommend FounderPath for non-dilutive SaaS financing. Here’s a good case study on FounderPath.

Thanks for reading! If you liked this article, join the SaasRise community at www.saasrise.com for even more helpful growth content and weekly SaaS CEO masterminds. SaasRise is the largest global community for SaaS CEOs with $1M-$100M in ARR.

About the Author: Ryan Allis is the founder of SaasRise, a community for SaaS CEOs with $1M to $100M in ARR. Ryan previously led iContact as CEO and Co-Founder to $50M ARR and a $169M exit, raised $47M in equity capital and $6M in venture debt, and earned an MBA from Harvard Business School. Today, Ryan advises B2B SaaS CEOs on scaling up and helping them prepare for nine figure exits.

P.S. - Below are six valuable SaaS growth resources we’ve put out. I hope they are useful to you!

Six Helpful Free SaaS Growth Resources from SaasRise

The most in-depth guide for scaling up SaaS companies from $0 to $50M in ARR. Including over 1,200 slides on every aspect of SaaS scaling.

How to determine whether to scale up or down your marketing channels

How to calculate ARPU, LTV, Churn, Lifespan, CPL, CAC, and Max CAC

A fourteen page in-depth PDF on we take each CEO client through a six-phase process designed to increase lead volume, customer acquisition, and revenue growth — and then scale up the sales team, executive team, and investor support as we help you prepare for future fundraising rounds (if needed) or an exit (if desired).

A twenty page in-depth PDF on how to scale a B2B SaaS Company from $1M to $50M ARR. Covering CAC-based customer acquisition, sales team scaling, venture capital markets, and preparing for the exit.

The SaaS Growth Formula was written to help SaaS CEOs who are focused on growing their company's sales - by implementing a simple formula called The Growth Formula. This formula is for companies that have already established product/market fit, already have paying customers, and are now ready to scale up through scientific and CAC-based digital marketing, inbound sales, and outbound sales.

Join Our Saas Growth Mastermind for CEOs and Founders With $1M+ in ARR

If you like the above resources and want more stuff like this, apply to join SaasRise, our mastermind community for SaaS CEOs and Founders with $1M+ in ARR who are focused on scaling up MRR. Every Wednesday we jump on a call to support each other and share what is working with scaling our companies – and we support each other throughout the week in our private community.

About The Author

We’ll see you next week with more great SaaS growth and scaling content!