We’ve got a secret for you – debt is not always as bad as it’s played out to be. If you play your cards right, debt can actually work in your favor. Find out how debt can grow your business, here.
As ridiculous as it may sound, debt can help your SaaS business and can grow your company. Growing a SaaS company requires a good source of funding. However, this fund is often not always available, especially if the company is still in the development stage with no cash inflow.
SaaS businesses counter this financial deficit by seeking financial assistance through equity financing or other forms of funding. However, debt financing has more benefits than these other funding methods and more than businesses give it credit for. Startup businesses like Airbnb and Uber have also taken advantage of the power of debt to successfully build their SaaS businesses, as mentioned in a Forbes article. In this article, we will be discussing how beneficial debt can be to your SaaS company.
Can Debt Be Beneficial to a SaaS Company?
Other forms of funding, like equity financing, allow you to give up a portion or percentage of your company in exchange for the money lent. This means you have to give up control of a particular percentage of your company, and they get to share the company’s profits and losses.
However, a significant benefit of debt compared to SaaS is that you don’t have to give up control of any portion of your company. All you need to do is pay up at the specified period. You still get to be the sole proprietor in strategic and decision-making decisions for your start-up SaaS company.
You also don’t have to go through stressful paperwork like the monthly and quarterly reports and calculations, unlike equity financing, all in the name of funding your business.
4 Key Benefits of Debt for a SaaS Startup
Funding your SaaS startup with debt comes with numerous benefits when compared to other sources of funding. Below are 4 key benefits that debt provides for your startup business.
One of the key benefits to taking debt as opposed to equity financing is that it is way less expensive. For equity financing, you have to give out a percentage of your company, and this doesn’t have a speculated time. This means they continue to reap more of your company’s profits even after the borrowed money is complete unless you buy out their position as a shareholder.
For debt, however, you only pay the money owed over a specified period, and once the money borrowed is complete, it is over. You don’t have to pay continuously, just until after the money is complete. This makes debt typically cheaper than other forms of funding, like equity financing.
Did you also know that you can make your debt tax deductible? Well, now you know. Majority of SaaS startup companies that are yet to have a cash inflow depend on their starting capital. However, it only takes so long until the capital starts to run low. This could be because of expenses that were too essential, and you might not realize enough to spend judiciously. Vlad Magdalin, the founder of Webflow, talked about how they spent their capital on items that could have saved them more money, and this didn’t occur to them until the money was almost all gone. To prevent operations from halting, they resort to other funding methods.
So, if a company takes on debt to make more money for the business, such as by continuing operations to complete development and starting to earn money or funding marketing strategies to attract more customers, or buying investment property for the business, the debt may become deductible. This means that the tax paid on the money borrowed is subjected to reduction.
You Keep the Profits:
Unlike equity financing, you don’t have to share your company’s profit with creditors when you take debt. The company gets to keep all the money it makes without worrying about a percentage going out of funding by equity financing.
Equity, on the other hand, gets a dividend payment from your company’s profit. The higher your profits get, the more money they can whisk away from your company, even more money than you borrowed.
Debt doesn’t care if the company makes any profits or losses. It only cares about getting back the money at the agreed specified period.
Long Term Payouts:
Another great benefit to consider is the long-term payouts that debt offers. When you compare companies that borrow debt and those that fund via equity financing, in the long run, the companies with the debt financing tend to have a more extended payout. These payouts result from the overall accumulated profits they didn’t need to share with external parties, like equity financing.
Debt: How Much is Too Much for a SaaS Business?
As beneficial as debt is for SaaS businesses, there is still something called “too much debt” that may be bad for SaaS companies. A debt is considered too much for a SaaS business if the business cannot repay it via the company’s internal business operations. This could be that the business is not generating enough revenue to be able to pay back the debt, or the business is burning more cash than its monthly generated revenue.
Taking on debt for a SaaS business with this condition is a risk and thus considered too much. For this business to be able to pay back the debt, they have to either lay off some of its workers, cut down on its expenses or find new ways to generate more revenue that would be more than enough for the business to thrive.
The Bottom Line
Although saying debt can help your SaaS business grow might sound strange, it is not untrue. Debt doesn’t require you to hand over control of a portion of your business, is tax deductible, and of course, is inexpensive. With all these factors and benefits put together and compared against other funding methods, debt has the edge over the others.
For SaaS startup companies that need growth capital to further the development of their companies, Intrepid Finance is here to save the day. We are venture capital partners that help SaaS companies with their capital based on their recurring revenue. So, if you are looking to fund your SaaS business, look no further because we are here to help you out. For more information, contact us at intrepidfinance.io.