Revenue-based funding and SaaS funding are two popular options for businesses looking to raise capital without giving up equity in their company. Both types of funding have their own unique costs and benefits, and it’s important to understand how they work before deciding which one is right for your business.
A normal SaaS (software as a service) business will find that securing funding through traditional channels can be difficult. Banks and other financial institutions are often hesitant to provide funding for businesses that are still in the early stages of development. For this reason, a lot of people turn to revenue-based financing. This is a special type of financing where you borrow money through a loan based on the amount of potential revenue you’ll make in the future. So, how much does this type of financing, as well as traditional financing, cost?
Revenue-Based Financing
Revenue-based funding, also known as revenue-sharing, is a type of financing in which a company agrees to pay back investors a percentage of its monthly or annual revenue, rather than giving up equity in the company. This can be a great option for businesses that have a steady stream of revenue but may not yet be profitable, as it allows them to raise capital without diluting ownership.
The cost of revenue-based funding can vary depending on the lender and the terms of the agreement, but it typically ranges from 2-10% of monthly revenue. For example, if a company generates $100,000 in revenue per month and agrees to pay back investors at a 5% rate, they would pay $5,000 per month to their investors.
One benefit of revenue-based funding is that it aligns the interests of the company and the investors, as both parties benefit when the company’s revenue grows. However, it can also be costly for companies with low revenue or slow growth, as they may end up paying a significant portion of their revenue back to investors.
SaaS Funding
SaaS (software as a service) funding, on the other hand, is a type of financing specifically designed for software companies. It typically comes in the form of a line of credit or a loan, and can be used for a variety of purposes, such as hiring new employees, investing in R&D, or expanding into new markets.
The cost of SaaS funding can vary depending on the lender and the terms of the agreement, but it typically ranges from 8-20% APR (Annual Percentage Rate) . For example, if a company takes out a loan for $100,000 with an APR of 15%, they would pay $15,000 in interest over the course of the loan.
One benefit of SaaS funding is that it can provide a business with a large sum of capital that can be used for a variety of purposes. However, it may also be more difficult to qualify for than revenue-based funding, as software companies may be required to have a certain level of revenue or profitability to be eligible.
Final Thoughts
Ultimately, the cost of revenue-based funding and SaaS funding will depend on the lender, the terms of the agreement, and the specific needs of your business. Before deciding which type of funding is right for you, it’s important to carefully consider the costs and benefits of each option and consult with a financial advisor.
In summary, Revenue-based funding is a type of financing in which a company agrees to pay back investors a percentage of its monthly or annual revenue which usually ranges from 2-10%. SaaS funding is a type of financing specifically designed for software companies, it typically comes in the form of a line of credit or a loan, and usually ranges from 8-20% APR. Both options have its pros and cons, and it’s important to do your research and consult with a financial advisor before making a decision.
