Debt Financing vs. Revenue-Based Financing: Which is Best For Your Startup?

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Jan 23, 2023 · by Alisher Akbarov
Debt Financing vs. Revenue-Based Financing: Which is Best For Your Startup?

Debt or revenue-based funding? This a common dilemma for many SaaS founders today seeking working capital to boost their startups. In this blog post, we’ll dive into the details of debt financing and revenue-based financing, exploring the pros and cons of each, so you can make a well-informed choice for your startup today.

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What Is Debt Financing?

Debt financing is when you borrow money from lenders, such as banks or venture capital firms, and pay it back in installments, with interest. It is suitable if you do not want to give up a chunk of your business and pursue growth plans without losing control.

Types of Debt Financing Available for SaaS Startups:

types of debt financing
  1. Bank Loans: A classic bank loan with a fixed interest rate and repayment term.
  2. Line of Credit: Flexible line of credit that you can access whenever you need it.
  3. Equipment Financing: A loan made expressly for the purchase of machinery or equipment, with the equipment serving as collateral.
  4. Invoice Financing: A loan secured by a company’s outstanding invoices.
  5. Merchant Cash Advance: A lump sum of money is given in exchange for a percentage of the company’s future credit card sales.

The ability of your company to secure a loan from lenders is mostly based on your current financials and creditworthiness.

Pros & Cons Of Debt Financing

Pros:

  • You don`t give up the shares of your company.
  • You have a set repayment schedule, which can help you with budgeting and planning for the future.
  • It can lower your tax bill since Interest on debt is tax deductible.
  • It`s quicker to obtain than most other alternative financing options.

Cons:

  • You have an obligation to repay the loan, which can put pressure on your cash flow and profitability.
  • You might need to put up collateral, either your business assets or personal, and puts it at risk of seizure if the loan is not repaid.
  • It can increase your company’s risk profile, as it adds debt to the balance sheet.
  • If the company encounters financial difficulties, it may be required to repay the debt early, which can be a burden on cash flow.

What Is Revenue-Based Financing?

Revenue-based funding, or royalty-based financing, is an alternative financing model designed for SaaS(Software as a Service) startups.

Instead of giving up equity or having to pay back a loan, you agree to pay a portion of your future monthly revenue to the investor until a pre-agreed amount is reached.

Therefore, it’s a flexible and less risky alternative to traditional financing that aligns with the startup’s growth and only requires repayment when the company is making money.

Who Provides RBF loans?

Revenue financing loans are typically provided by alternative lending companies, startup accelerators, venture capital firms, and sometimes angel investors. These types of investors are looking for higher returns than they might get from traditional investments, and they believe in the growth potential of the company they are investing in.

How does it work?

How does Revenue-based financing work

Investors will check your recurring revenue to decide how much money they can lend you. Most of the finance providers set maximum investment amounts of up to a third of the company’s ARR(Annual Recurring Revenue) or four to seven times their MRR(Monthly Recurring Revenue). Repayment fees are usually 6-12% of the company’s revenue.

Pros of Revenue-Based Loans

  • You keep full control over your company.
  • Unlike debt loans, you don`t need to provide collateral as a guarantee to pay back your loan.
  • It`s more flexible since repayments are based on revenue, not planned paybacks.
  • You have faster access to capital as it often requires less documentation and fewer requirements.

Cons of Revenue-Based Loans

  • It requires startups to have a proven, steady revenue stream.
  • You may be pressured to prioritize short-term revenue growth over long-term sustainability and profitability.
  • You might raise smaller capital, if you are a small startup will a relatively low MRR(Monthly Recurring Revenue) or ARR(Annual Recurring Revenue).

A magic third option? Welcome, Comfi!

Comfi is another way to boost your B2B startup that provides you with the upfront capital you need without giving up your equity or putting your startup at risk of debt default.

Comfi is a Buy Now, Pay Later (BNPL) solution developed for B2B SaaS providers. It allows your customers sign up for your annual subscription plan, but pay monthly at a discounted rate, while you get paid upfront by Comfi. No risk to you.

An infographic that describes the benefits of Comfi to both B2B SaaS providers and their customers.

Pros of Comfi

  • Instant revenue boost as Comfi upsells annual plans to your users, turning your MRR into ARR.
  • Your sales team has one more incentive to offer your prospects to turn them into paid customers.
  • No interest rates on monthly payments and no collateral needed.
  • Offer Comfi only when it can save a deal or push more revenue with no recurring fees. There is only a small fee per transaction.

Cons of Comfi

  • None
Let’s talk your revenue together
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Amal Abdullaev

Co-founder at Comfi

Which Financing Is Best For Your SaaS Startup?

Choose debt funding if:

· It is important for you to know precisely how much money you owe each month;

· You are comfortable making set payments every month;

· You are qualified for a bank loan, having a good credit history and good credit rating;

· The money will be used for variable costs and the investment can result in immediately increased cash inflow.

Choose revenue-based lending if you:

· Are a company with seasonal performance;

· Need to invest in initiatives that are not very likely to drive revenue right away;

· Require a small amount of investment for a short period of time;

· Don’t want to wait for the lender’s decisions for months.

Choose Comfi if you want to:

· Increase your cash flow for good, not just use a loan that you have to pay back. Effortlessly upsell your customers and turn MRR into ARR;

· Minimize acquired capital’s associated risks;

· Have money for any investment purposes, short-term or long-term, whether it will drive revenue in the near future or not;

· Improve your customer’s experience by offering payment flexibility;

Conclusion

Before binding your business to any form of financing, it’s vital to consider its long-term obligations. All types of lending has its own risk. See what form of investment you need at the moment, what you qualify for, and what obligations you can meet without jeopardizing your business.

Let’s talk your revenue together
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Amal Abdullaev

Co-founder at Comfi

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Attending offline events is a valuable opportunity for startup founders to network, learn, gain exposure, and find inspiration, so register for an event near you today!
Alisher Akbarov

Alisher Akbarov

Co-founder, COO

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