How to choose the best financing option for your SaaS start-up?

25. August 2023
3 mins read

Ever thought about why alternative financing solutions exist? Why don’t companies rely solely on traditional funding? It’s because, at a certain stage of your SaaS growth, you will definitely need an alternative.

Given the business nature of SaaS startups such as high growth but negative cash flow and lack of physical assets, access to bank business loans is difficult. Other traditional solutions such as venture capital (VC) or venture debt (VD) can be considered as an option. However, the emergence of new technologies increased the diversity of more attractive funding solutions and enlarged the finance scope for SaaS growth opportunities.

Moreover, existing studies discussed the significant impact of the chosen funding option on companies’ growth and performance. This means, choosing the best financing solution for your SaaS start-up at each stage of growth becomes necessary.

In this blog, we will help SaaS entrepreneurs compare the different available financing options for them, and explore the financing spectrum in this digital era!


Key takeaways:

  • The chosen funding option can significantly impact a SaaS company’s growth and performance.
  • Traditional financing options like bank loans might be difficult to access for an early stage SaaS startups.
  • Early-stage SaaS companies are considering shorter-term funding solutions due to market uncertainty and the challenges of repayments tied to high churn and changing market conditions.
  • VC funding can lead to high control and dilution of equity ownership in the company.
  • Revenue-based financing is non-dilutive but requires giving up a portion of future revenues
  • Intelligent Financing (e.g., Tapline) Allows SaaS companies to predict cash flow gaps and exchange subscriptions for instant cash without giving up future earnings, dilution, or restrictive debt. It involves short-term repayments.


Traditional funding solutions


At the first steps of starting a SaaS business


To bring their ideas to fruition, founders think about traditional ways to secure funding. One of the most famous traditional solutions is venture capital equity, which consists of giving up a percentage of equity ownership in exchange for funds.

In order to access capital, SaaS start-ups should:

  • Prove their highly possible success, and also present a business plan, marketing plan, and a detailed pitch deck.
  • Then execute the due diligence process.
  • As a result, it can take up to 3 months to receive funds.

This can lead to losses and missed investment opportunities for the SaaS co.

Despite the expertise and guidance that VCs provide for a SaaS start-up, it can have a high controlling power over the company. Also, venture capital funding can dilute your SaaS equity ownership, which can reduce the value of your personal equity stake in the company.

On the other hand, studies have shown that VC-backed start-ups have higher growth rates, however, SaaS founders must be aware of their financing choices and bridge their funding gaps with a complementary financing solution such as Tapline’s. This can help reduce the risk of dilution and equity losses associated with VC funding and avoid down rounds.


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As a SaaS company advances to the growth stages,


It often seeks venture debt financing.

It’s a form of debt financing that involves covenants and restrictions that help venture debt providers secure collateral in SaaS businesses. Similarly, to VC funding, venture debt holds the risk of dilution but with a lower probability.

In addition, bank loans, are another traditional financing option, with the lack of sufficient collateral, operating history, and time in the business, access to this financing is difficult for an early SaaS start-up.



Tapline vs. Traditional financing solutions


Tapline vs traditional financing



Financing in the digital era


Despite having recurring revenues and high financial returns which is attractive for VCs, some SaaS start-ups do not fit the VC mold.

With the difficulty to access bank loans, and venture debt for early-stage SaaS start-ups, they should undertake alternative financing solutions that are diverse with the advanced technologies emergence.


Revenue-based financing (RBF):


RBF is one of the alternative options. It consists of selling a share of a SaaS recurring revenues, it’s a non-dilutive financing solution, where the company’s revenues function as subordinate debt. However, many SaaS companies choose not to give up a portion of their future revenues and instead opt for alternative solutions such as Taplines Intelligent Financing.


Intelligent financing:


Unlike pure revenue-based finance, lets SaaS firms predict cash flow gaps, and exchange subscriptions for instant cash, without paying a % of their future earnings, dilution, or taking on restrictive debt.

  • This approach involves making short-term repayments.
  • It can result in favorable rates.
  • Gives the ability to trade month on month.

Also, it can help to ensure that resources are available for future investments and prevent future cash flow gaps.


Warrant-free loans:


Other fintech companies are providing warrant-free long-term loans. With the uncertainty facing the global market, SaaS companies especially during their early stages are shifting from long-term loans to alternative shorter-term funding solutions mainly for the following reasons:

  • While grace periods can provide initial relief and help retain cash reserves, they can also have a negative impact on opportunity cost and total interests paid over the loan term.
  • The high volatility of churn in namely B2C SaaS start-ups as well as changes in market and business conditions, can make it challenging to execute repayments in the future, resulting in cash flow gaps.



Why Tapline’s solution?

Tapline vs competitors


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