SaaS means opportunity for entrepreneurs. The SaaS market is exploding — the market’s estimated worth is expected to reach $247 billion in 2024.
For investors, SaaS means security. One of the most appealing features of SaaS startups is their sticky revenue streams, which make them less risky investments. SaaS companies often start generating revenue much earlier compared to startups in other tech categories. And thanks to their higher margins, many are able to bootstrap for a long time to gain early traction.
At some point, though, not fundraising means limiting growth.
Do you have enough runway to reach that next level when opportunity strikes? What SaaS funding options are out there if you need more capital?
Banks are notoriously averse to lending to SaaS startups. This is because bankers have much lower risk tolerance, and they can’t underwrite a loan based on the value of non-tangibles like prepaid subscription-based revenue. Without any hard assets or personal guarantees for collateral, the chance of getting a traditional business loan is slim.
Equity funding has its downsides, too — for many founders, it’s not worth diluting equity and ceding control of the business for a few million dollars.
What’s more, venture capital has been harder to come by as large portfolios and low exits burden VCs. The Fed's recent rate cuts have spurred optimism that an uptick in exits is on the horizon; however, the macroeconomic impact on startup funding is far from certain.
VCs remain cautious for now. Recent data from Pitchbook suggests Global VC fundraising activity is trending towards a 9-year low for 2024.
Source: PitchBook's Q2 2024 Global Venture First Look (Pitchbook, June 30, 2024)
There are still good debt funding options for an early-stage SaaS startup, though. In fact, global private debt funds surpassed venture capital fund volume last year and produced a 10.5% return. With stronger returns, LPs invested nearly $170 billion into private debt funds in the four quarters leading up to the end of March 2024.
Heading into Q4, you're most likely starting to plan and budget for 2025. There are good reasons to secure funding for your startup before the end of the year. And with lower interest rates expected through the end of 2024, there's no better time to explore SaaS funding options than right now.
SaaS Funding for Growing Startups
Our experienced team at Lighter Capital has connected with thousands of SaaS entrepreneurs considering non-dilutive debt financing over more than a decade. Below, we share today's best SaaS funding options to help you extend your startup's runway and drive business growth in 2025.
1. Internal funding sources / convertible debt
Before gaining traction, many early-stage tech entrepreneurs look for loans from sources close to them: co-founders, board members, or friends and family. They often structure these loans as convertible debt.
Convertible debt is relatively low-interest and converts into equity at a specified date (generally after raising a funding round). It’s flexible for investors and founders, but there are a few common traps to watch out for:
Subordination terms. If the terms are aggressive, they can inhibit your ability to get additional debt from other institutional lenders later on.
Maturity date. Some convertible loans mature at 24 months, but some are much shorter: 18 months or even 12. If you’re unable to raise a round of equity financing before the maturity date, your convertible notes won’t convert to equity, and you’ll owe a big payment.
2. Revenue term loans
This familiar term loan structure offers upfront cash that’s paid back in fixed monthly payments over a predetermined amount of time. These loans are straightforward and predictable, compared to less conventional debt instruments.
Unlike a traditional term loan from a bank that’s hard to get and will likely require collateral to secure the loan, as well as debt covenants that restrict your business operations, a revenue-based term loan is far more SaaS-friendly. The application process is quick and easy, and you don’t have to put your house on the line to fund your runway! Secured against your recurring revenue streams, you won’t get the ultra-low interest rate you would from a bank, but it’s far more affordable than selling equity for capital to grow your business.
3. Revenue-based financing
If you’re generating $200,000 in ARR or more, Lighter Capital’s revenue-based financing can be a good option for you. We specialize in providing non-dilutive growth capital to SaaS startups and our three- to five-year loans are structured with payments that ebb and flow with your monthly revenue streams.
Early-stage SaaS companies often have lumpy or seasonal cash flows, and the revenue-based financing model is designed to suit this business model well. You'll have smaller payments in tight months and bigger payments in flush ones, which means you won't be on the hook for fixed monthly payments your business can't support.
Shopping for debt? Don't sign a deal until you've read our buyer's guide.
Explore the ins and outs of debt financing so you can avoid tricky terms and conditions that might hold your startup back.
We give you 10 questions to ask when considering a business loan that will guide you through comparing debt financing offers and help you understand the real costs in our comprehensive guide for entrepreneurs.
4. A/R factoring
With a SaaS business, your payment schedule can vary. Some clients may pay you on a monthly basis, but some may pay net 60, or even 90. A/R factoring allows you to borrow money based on your accounts receivable. Your ability to get the loan approved will depend heavily on the quality of your contracts. For example, if you have a Fortune 500 client, banks will feel much more comfortable lending to you than a company with contracts from companies that are just starting out or less established.
5. An MRR line of credit
The monthly recurring revenue or MRR line of credit is a relatively new lending instrument. SaaS businesses have monthly recurring revenue, and some lenders are willing to lend between 3–5X of your MRR to help you grow faster. If you have $5 million in annualized revenue, a tech bank may have products that are similar to MRR lines for you. Most lenders, however, will require a personal guarantee, so make sure you read the fine print before you sign.
Typically, lines of credit are ideal for short-term working capital expenses, not investments in long-term growth, since the capital can become very costly if it’s not paid back quickly.
Realize your dreams, on your terms.
Since 2010, Lighter Capital has helped startups grow through more than 1,000 rounds of funding and over $350 million in non-dilutive financing. More than 20% of our portfolio clients have been acquired by companies that include Amazon, Salesforce, and Eventbrite.
Learn more about how our financing works. Or complete our secure online application to find out how much you can qualify for.