The SaaS market is expected to grow at an average CAGR of 18.7% from 2023 to 2030. If you want to grow and adapt fast, one option is to get financing for your business.

SaaS financing goes beyond a cash influx. It's a strategic move that can dictate the trajectory of your company. In your search for funding options, you'll find SaaS lending solutions tailored to the recurring-revenue model and other options designed to fit a rapid-scale business.

Each of these options has pros and cons that can have a lasting effect on your venture's future.

As we review the SaaS loans and SaaS debt financing options, you'll learn that the right financial partner not only provides capital but also invests in your vision. This article aims to help you understand how SaaS financing works by providing clarity and direction for businesses that are ready to grow.

Whether you're looking to bolster your growth, expand your market reach, or refine your product offering, understanding your options for SaaS financing is the first step to making empowered, strategic decisions.

Related: How To Get A Loan To Buy A Business: All You Need To Know

What is SaaS financing?

SaaS financing is the financial lifeline for your SaaS venture, allowing you to access the capital needed for growth. This form of financing is custom-fit for companies with a SaaS revenue model, providing a predictable and scalable income. Imagine being able to finance purchases like hiring top-notch developers, launching a unique marketing campaign, or fine-tuning your software suite.

With SaaS financing options like tailored loans and debt instruments, you get the capital injection you need when you need it. SaaS loans aren't your average loans; they're structured to match the rhythm of your monthly recurring revenue (MRR), with repayment models that sync with your cash flow. This means you can invest in growth initiatives today and pay back the funds in alignment with your revenue upticks, smoothing out the financial peaks and valleys often encountered by fast-growing SaaS businesses.

Preparing for SaaS financing

When it's time to secure financing for your business, having your ducks in a row can make all the difference. Here's a checklist to ensure you're primed for the process before we dive into each type of SaaS funding options:

1. Have updated and accurate financial documents at the ready, including income statements, balance sheets, and cash flow statements.
2. Be prepared to discuss key SaaS metrics such as Customer Acquisition Costs (CAC), Lifetime Value (LTV), churn rate, and MRR. Presenting strong evidence of these numbers can help you build your case when it comes to looking for SaaS financing.
3. You should have strong customer retention rates that can support your company throughout the future for the upcoming loan payments.
4. Show a list of your team and their roles that will be key for reaching the business goals.
5. Craft a detailed business plan that clearly outlines how you intend to use the SaaS funding to scale and grow your business.
6. Understand and be able to articulate your market position, the competitive landscape, and your growth potential within the industry.
7. Be ready for a possible concise explanation of the company's sales process.
8. Know precisely what you need from a SaaS financing deal, from the amount to the payback terms, and be ready to communicate these needs clearly.
9. Have a strategic plan for the capital you're seeking, whether it's for marketing, product development, or expanding your team.
10. Be open about your business's performance and financing needs to build trust and alignment with a potential SaaS lender

Keep in mind that requirements may vary according to the lender's conditions and expectations for the loan. And, also these may change depending on the type of SaaS financing you are looking for.

SaaS financing for each stage of the company

Funding for SaaS companies looks different depending on the stage of the business. Initially, founders can rely on angel investors or bootstrapping, but as the company generates revenue, they might consider revenue-based funding. As the SaaS evolves, they might go for traditional loans, private equity, venture capital or consider going public.

1. Early-stage funding: Funding a business from the start

Early-stage SaaS will focus on building a minimum viable product that caters to users' needs, getting to know the market through research and testing, and creating a plan to deliver the product to new customers: the go-to-market strategy. Acquiring funding at this stage is more challenging since traditional loans often require a proven track record of revenue. Because of this, founders might lean toward bootstrapping or getting alternative lending options or non-traditional loans.

2. Growth-stage financing

Once the product demand starts to increase, SaaS companies often need to support this growth by expanding the team or increasing resources such as the tech stack. At this point, experts in customer service, marketing, and sales skills are brought in to help accelerate growth.

It is common for SaaS companies to look for funding during their growth stage and one option can be venture capital.

3. Stabilization and beyond

When SaaS companies reach this stage they're in the process of achieving profitability and sustainability. It's about operational efficiency, reducing churn, and improving unit economics in general.

By this time, companies already have a steady base of loyal customers and can focus on developing features and optimizing the product to stay ahead of the curve.

At the later stage, SaaS companies can choose between two paths. The first one would be a merger or acquisition, while the latter centers on keeping the business growth cycle.

How to finance a SaaS company?

Once you understand the stage where your business is at and it's ready for funding, it's time to choose which is the best source of SaaS financing. Here are some of the best options:

1. Convertible debt and early SaaS funding

Early funding is a critical step on the path to SaaS market leadership. Convertible debt is a common early funding strategy for SaaS startups, offering a unique blend of flexibility for both founders and investors. It's a type of short-term SaaS debt financing that converts into equity, typically after a subsequent financing round, giving your early supporters a chance to become shareholders under predefined conditions.

Here's how it can play out for your SaaS business: You secure a loan under the agreement that the amount loaned will later convert into equity, usually during a Series A funding round, or at a specific date. This SaaS financing method is beneficial because it delays valuation discussions until your business has a stronger footing and a clearer growth trajectory. For the SaaS entrepreneur, this means retaining control while you scale, and for investors, it offers the potential upside of equity in a high-growth company.

However, navigating convertible debt financing for a SaaS business requires a keen eye on the details. Terms like interest rates, valuation caps, and discount rates can all influence the deal's attractiveness to both parties. Additionally, you'll want to watch out for subordination clauses that might restrict future borrowing, and pay close attention to the maturity date to avoid repayment pressures if equity financing doesn't materialize as planned.

2. Revenue term loans for SaaS businesses

Some SaaS financing options work under a model in which they're able to obtain capital in exchange for an equity share of the business. But businesses can also access another option called revenue term loans. These financing plans work for companies with an already established revenue pattern. Here's why they might be a good fit:

• Predictable Repayment Plans: Unlike variable SaaS financing methods, revenue term loans offer fixed monthly payments over a set period. This predictability aids in financial planning and budgeting, as repayment doesn't fluctuate with your business's revenue.
• No Collateral Needed: SaaS companies often lack the physical assets typically required for traditional loans. Revenue term loans for SaaS companies bypass this by securing the loan against the business's recurring revenue streams.
• SaaS-Friendly Application Processes: These loans are tailored to the SaaS business model, meaning lenders understand your unique financial picture. The application process is generally streamlined, focusing on your revenue and customer retention metrics rather than physical assets.
• Flexibility for Growth: The cash injection from a revenue term loan can be directed towards various growth strategies, such as scaling your sales team, increasing marketing efforts, or investing in product development.
• Avoiding Equity Dilution: Like other types of SaaS loans, opting for a revenue term loan over equity financing means you don't have to give up a share of your business. That means you retain full ownership and control over your company's direction and decisions.

SaaS businesses can tap into revenue term loans from alternative lenders who offer a more nuanced understanding of the SaaS model and its financial metrics. Compared to traditional banks, these lenders can provide quicker access to capital with less stringent collateral requirements and more flexible, revenue-aligned repayment terms. Opting for an alternative SaaS lender can afford companies the tailored financial solutions they need to fuel growth without the burden of traditional loan constraints.

3. Leveraging accounts receivable for SaaS financing

If your organization has a robust billing cycle and solid customer contracts, leveraging accounts receivable (A/R) can be a strategic SaaS financing option. Here's how A/R financing can benefit a SaaS company:

• Immediate Cash Flow: A/R financing turns your outstanding invoices into immediate cash, which can be particularly useful as SaaS financing for covering short-term expenses or investing in growth opportunities without waiting for customer payments.
• Based on Customer Creditworthiness: The financing amount is often determined by the creditworthiness of your customers, not your business, which can be advantageous if you're servicing reputable clients with reliable payment histories.
• Avoid Debt Accumulation: Unlike traditional SaaS debt financing that adds to your company's liabilities, A/R financing is not debt - it's an advance on money owed to you, so it keeps your balance sheet cleaner.
• Flexibility: A/R lines of credit can be scaled up or down based on your current receivables, providing flexibility as your billing and customer base grow.
• No Equity Sacrifice: By leveraging your receivables for SaaS financing, you maintain full equity in your company, as you're not selling a stake in exchange for capital.

4. Monthly recurring revenue credit lines

Monthly Recurring Revenue (MRR) credit lines offer a lifeline to SaaS businesses by providing a flexible financing solution based on the predictable revenue streams that are the hallmark of this market. With an MRR line of credit as your source of SaaS financing, your company can secure funding by borrowing against the strength of its consistent monthly earnings. This type of credit line is an attractive SaaS funding option because it is tailored to the unique business rhythms of SaaS models, offering a capital infusion that can be directly proportional to the business's revenue performance.

For SaaS businesses hitting their growth stride with substantial MRR, these credit lines can accelerate expansion plans, enabling investments in new market penetration, product enhancement, or workforce growth. A SaaS lender specializing in MRR credit understands the sector's potential and is often willing to offer credit lines ranging from a fraction to a multiple of your MRR, providing a significant boost without the need for traditional collateral.

However, it's essential to approach MRR credit lines with a clear strategy, as they are typically best suited for bridging short-term funding gaps rather than serving as a long-term SaaS financing solution. The cost of capital can become burdensome if not managed wisely, so it's crucial to read the fine print and fully understand the terms, especially if there's a personal guarantee involved. 

5. Venture debt financing solutions

SaaS financing is available in the form of venture debt. This funding works for companies in which owners and founders can maintain control while accessing capital. This isn't a revenue-based financing option since current profitability isn't among the requirements for accessing it. 

On the downside, it can be more expensive than traditional bank loans due to the risk. 

6. Bank loans

They might not be the most attractive funding solution nevertheless, it's an available resource for all entrepreneurs out there. Due to the structure of a bank loan, owners and CEOs don't lose control over the business. And sometimes, they can be flexible and cheap according to their interest rates.

The con is that banks ask for assets and profitability when granting a loan. 

Selling your SaaS: The other option

If you are unsure whether to get funding for your SaaS to grow or selling it, Boopos can help you decide. You can start by talking to one of our advisors.