Debt Financing vs. Revenue-Based Financing

Published in

Comfi Payments

8 min readJan 6, 2023

You have built your SaaS company, and feel like you have more potential to grow, but you have a limited amount of money. Where do you get your capital from? There are several financing ways for you to choose from. Today we will talk about debt-based and revenue-based financing, and which one is right for your SaaS business.

The choice of the best option for you will depend on several aspects, such as your current profitability, future profitability, reliance on ownership and control, and whether you can qualify for the desired financing method. So, let’s get into it!

Definitions

Debt financing is the usage of a loan or bond issuance to get funding for a business. Debt financing is usually used for gaining additional working capital, buying assets, and acquiring other entities. Debt financing can be short-term and long-term. Short-term debt financing is one that is expected to be paid off within a year, and is used more to obtain working capital. Long-term debt financing is a debt that has a maturity of 12 months or longer. It is mostly used to acquire assets, such as equipment, buildings, land, or machinery.

The most popular way of borrowing is from a bank, but in fact, there are many types of debt financing that are available to SaaS startups. They include credit cards, micro loans, business loans, and peer-to-peer loans.

By getting debt financing, the company has the obligation to pay back the loan and the interest by a future date. The ability of your company to secure debt financing is mostly based on your current financials and creditworthiness.

Revenue-based financing, also called royalty-based financing, is a way of funding a business from investors who receive a percentage of the company’s ongoing gross revenues in return for the money they invested. Investors receive a regular percentage of the business’s income until a pre-agreed amount has been paid. Usually, the company has to pay back between three to five times the original amount invested.

Unlike debt financing, a company using revenue-based financing does not pay interest on the investment, and there are no fixed payments. Monthly settlements are proportional to how well the business is doing, as payments differ based on the amount of the business’s income in a given month. In addition, in revenue-based financing, there is no requirement for a company to provide collateral to investors.

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

Pros and Cons

Debt Financing

Pros

Easy planning. With debt financing, you know in advance exactly how much principal and interest you will pay back to the lender each month. This makes it easier to budget and plan for your company’s future.

Lower tax rate. A key consideration for usage debt financing for your company is taxes. In most cases, the principal and the interest payments on your loan are classified as business expenses, so they are tax deductible as long as you’re borrowing money from a real lender, like a bank, not friends or family, and using it for business purposes. It effectively reduces your net obligations.

Build business credit. Tax deductions affect your overall tax rate, while making timely payments on your debt financing can help build your business credit and establish strong business credit scores. Developing a good business credit history can help you be suitable for loans with the most competitive interest rates and repayment terms in the future.

Retain control of your business. Debt financing lets you keep full control of your business, the lender has no voice in your company’s management. The bank charges you interest on the money you borrowed, but they do not get involved with your day-to-day operations. You make all the decisions with no outside interference from investors. The business relationship ends as soon as you have repaid the loan in full.

Cons

Difficulty to qualify. Your credit rating has to be good enough to receive financing. Debt financing can be hard to get options, such as bank loans, that offer the best terms and loan rates. To get a bank loan, usually you need excellent credit, several years in business and strong finances. Recently-started businesses and ones with a fair or bad credit history typically have a harder time obtaining affordable debt financing.

Financial strain. Debt can make it difficult to manage your business finances, especially for seasonal businesses or companies with inconsistent cash flow. Not all businesses sell the same amount each month, but lenders expect payments in equal monthly installments. Some businesses may find it challenging making constant payments on the loan, regardless of their revenue. You are also supposed to grow operations while managing and repaying debt.

Collateral risk. For many lenders, you may also have to put up collateral. By agreeing to provide collateral, some of your business assets become put at possible risk. And if you are asked to personally guarantee the loan, your own assets may be jeopardized.

Credit rating effect. Your debt affects your credit rating negatively if you’re borrowing large sums of money and cannot pay back on time. Late or missed payments will negatively influence your credit history, leading to difficulties in qualifying for financing in the future.

Revenue-based financing

Pros

Non-dilutive. Just like debt-financing, revenue-based financing allows you to keep full control over the company. You maintain ownership, control your business, and keep your equity. Investors don’t gain authority through board seats, so you determine your company’s direction. That’s especially important for startups who have the potential for fast growth but need more cash.

No collateral needed. Debt options like bank loans need you to guarantee a loan, putting your personal assets at risk. Revenue-based financing doesn’t require this commitment. Company founders don’t need to secure a loan with personal collateral, thus revenue-based financing is a less risky option than debt financing.

Flexible repayments. Repayments are based on revenue, and since monthly payments are flexible, lower income will not hinder your ability to pay. That means you don’t need to worry about monthly payments if you’re a seasonal business, or if the pandemic times return.

Faster and cheaper funding. It is less expensive than alternatives, and startups can secure revenue-based financing within a month. Funding methods like angel investors and venture capitalists require 10 to 20 times more in returns, and using a bank loan you have to pay interest. Also, with revenue-based financing, you can attain the money you need much faster. Investors don’t need months to make their decisions.

Cons

Revenue required. Lenders will investigate your company’s ability to generate revenue. You might not be able to secure funding if you’re pre-revenue. In addition, you may face the same problem if your financial history is inconsistent. Thus, revenue-based financing is not suitable for startups without regular income.

Smaller loan amounts. With revenue-based financing, there is less money available for you to borrow than with other financing options. Being a relatively small company means you are qualified for a loan that’s much smaller than what you might raise with an angel investor, because revenue-based financing is always based on your MRR or ARR.

Suits only long repayment periods. Startups looking for long-term repayment periods (more than a year) might better consider a standard bank loan than revenue-based financing. The latter is great for funding short-term activities that drive revenue that can be used to repay the investment. When these settlements drag out for longer than a year, a fixed term bank loan becomes more beneficial.

Comfi

Comfi is another way to boost your business and increase your B2B SaaS startup revenue without giving up equity, with no interest fees and collateral.

Comfi is a recent Buy Now, Pay Later (BNPL) payment method created for B2B SaaS companies. Comfi assists vendors in selling more annual contracts and getting upfront capital, while at the same time helping startups and SMBs save money and predict cash flow by paying monthly for their annual contracts with a SaaS provider with no interest.

With Comfi, SaaS providers can offer their users to divide their SaaS subscription costs and purchase annual plans by paying in monthly installments. Your customers can split payments into 12 interest-free tranches over 12 months. Comfi pays you the whole sum upfront within 7 days.

Pros

Revenue increased. Instant revenue boost as Comfi upsells annual plans to your users, turning your MRR into ARR.

Sales leverage. Your sales team has one more incentive to offer your prospects to turn them into paid customers.

No interest and collateral. No interest rates on monthly payments and no collateral needed.

Suits all kinds of businesses. 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

None

What Financing to Choose

Choose debt financing if:

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

· You are comfortable making set payments every month;

· You are qualified for debt financing, having a good credit history and good credit rating;

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

Choose revenue-based financing 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, weather it will drive revenue in the near future or not;

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

Make the Right Choice

Before binding your business to any form of financing, it’s vital to consider its long-term obligations. All types of financing mean risk is a must. See what form of financing you need at the moment, what you qualify for, and what obligations you can meet without jeopardizing your business. Implement Comfi for instant revenue growth of your company with no interest fees or collateral.

Choose Comfi as your payment method provider!

Get our new 5-Step Guide on Revenue Growth here!

Email us at: hi@comfi.app

Visit our website: https://comfi.app

Debt Financing vs. Revenue-Based Financing

Definitions

Pros and Cons

Debt Financing

Pros

Cons

Revenue-based financing

Pros

Cons

Comfi

Cons

What Financing to Choose

Make the Right Choice

Published in Comfi Payments

Written by Veronika Petruleva