As more companies have embraced the work-from-anywhere necessity of 2020 and beyond, most have moved to cloud-based systems that balance security and efficiency without being location dependent.
SaaS products like these used to be something companies would add after they experienced success, but it’s becoming a necessity to include SaaS early in a company’s growth as the workplace landscape has changed.
SaaS products seem feasible because of the recurring monthly cost, rather than a large upfront expense that can hit your budget hard. But, for startups who are not yet generating consistent revenue, that monthly expense still has to come from somewhere, whether you make the sales that month or not.
So, the big question for startups who know they need to invest in SaaS (and possibly multiple SaaS products, from CRMs and file storage to HR and messaging software) is how to ensure they can pay for all this SaaS not just once, but every month.
Option 1: The traditional ways – equity funding and bootstrapping
If you’ve bootstrapped your startup, then the fear that you’ll personally have to reach into your pocket to fund next month’s SaaS expenses is not one you want to have hovering over you.
While bootstrapping often leads to founders wearing all the hats and working full-time jobs elsewhere during the day, at a certain point, you need to spend money. If you’re heavily investing in SaaS, you’re going to have to do that every month, and most founders aren’t comfortable with that long-term commitment.
Once startups find angel investors or negotiate rounds of VC funding, they can plan more seriously for growth. They will usually invest these large capital investments (which often come at an equity cost) into big items like research or launching products. The focus of obtaining equity funding is to obtain a large sum that you make last for as long as you can for your business expenses.
You are paying a high price: a piece of your business, which is often necessary for this kind of big picture thinking, in return for funding. But is this risk the right one to attach to regular and recurring costs?
Equity funding is great for the less predictable areas, like testing product lines or that big asset purchase you need to make to start creating products. The high-risk nature of this type of funding means you’ve paid for it heavily, and so you don’t always want to use it for the kind of consistent, recurring items that will be in your balance sheet every month. That is a surefire way to drip lots of that funding before you get the opportunity to use it for the projects that could really move the needle on the solutions you provide.
Option 2: The ‘next step’ – non-dilutive debt
Startups generally consider moving to debt only once they’ve had a measure of success with their VC or angel funding. Debt is much more suited to consistent monthly costs you can plan for and can allow you to pay interest only on what you need from month-to-month. It also allows you to keep the ‘standard’ business costs separate from the areas that have the potential to massively fuel growth.
The biggest problem that startups find with bank debt, however, is convincing a bank to lend to them in the first place. Especially if you are a SaaS company yourself, or are generally light on assets, then a bank might not be willing to underwrite you, even if you have data to show that money will start coming in as revenue.
So if you’re an early stage asset-light company with data to suggest that you’ll be making money soon but it’s not quite consistent yet or won’t hit the bank accounts for a few months, what other options are out there?
Option 3 - alternative financing
That often leads founders to look at other types of financing, from merchant cash advances to asset finance. These options often are specific to having certain assets or property, for example, or focus on giving fast access to financing that comes at a high cost and often unfavorable terms.
Depending on how long you need financing to cover recurring costs, most of these alternatives have a significant downside that means you are paying for them heavily in one way or another (usually interest and high loan fees). This is usually justified by the lenders on the basis that you can’t get the funding elsewhere and these predatory lenders often feel that they have the upper hand on you as the borrower.
At this point you have to balance the ‘value’ of using equity funding that might be available, and take it’s focus away from the high-growth activities, or paying a large percentage of interest on debt, and knowing the money will be there to do that in the short-to-medium term.
So are these the only options available to startups?
Option 4 - non-dilutive revenue-based financing
Turns out there is another option, and it’s one that many companies have been using recently.
If you are a SaaS business or one with dependable annual recurring revenue (ARR), even if you’re light on assets, you can access non-dilutive financing at a cost that doesn’t have to ‘break the bank’. It allows you to focus the diluted financing you may already have obtained (like VC or angel funding) on the projects that can provide the biggest impact, and potentially extend the runway of using those funds before you need to apply for another round.
The benefit of non-dilutive financing like this is that you can use the potential of your ARR to obtain financing and ensure that consistent monthly costs on items that will encourage growth, like CRMs, enterprise software, or marketing platforms can be met without having to take focus (and money) away from your plans to grow the company.
A debt-based approach to capital spending
Alternative financing has the benefits of a capital investment, with the pluses of a more debt-based approach.
Lenders in this field will underwrite an offer based on your ARR, but you don’t need to draw down the funds until you need them. And you can draw down just the specific amount you need for the time you need, only paying interest when the money is working for you. As you focus your equity funding on growth, your ARR increases over time which means the original underwritten offer, since it’s a percentage of your ARR, will grow as you grow.
No need to wait weeks or months renegotiating terms. If you already use SaaS to run your startup, these lenders can plug into your systems to analyze your metrics and underwrite within days, not months.
That means that using the right SaaS (at the right price) as early as possible not only keeps your startup efficient (and therefore helps growth), but could allow you to access non-dilutive financing faster when you’re ready.
Instead of putting off SaaS purchases until your business has “made it”, consider adding SaaS products early to streamline your business through financial and capital planning, allow you to focus on growth, and set you up for success when you need metrics on your future revenue.
Don’t forget that you don’t need to use equity capital or expensive debt-based financing to do so. Consider the many different options that are opening up for startups as the world gets more used to using SaaS products for every cog within a business.