Revenue-based Financing for SaaS: How It Works

Funding can be a minefield for ambitious SaaS companies.

Equity funding typically requires some sacrifice of ownership and control of your business.

And traditional bank loans can be hard to get because of the perceived risks associated with SaaS - especially early phase SaaS companies.

Revenue-based finance (RBF) can be an ideal alternative to traditional equity or debt financing.

It can give SaaS businesses the funds they need to invest and grow quickly, without many of the downsides that come with other funding methods.

In this blog you’ll learn everything you need to know about how revenue-based finance for SaaS companies works, and why so many founders are turning to the finance model to grow their company.

What is Revenue-Based Financing, and How Does it Work for SaaS Companies?

Revenue-based finance works by providing SaaS businesses with funding in return for a percentage of future revenue.

Unlike debt finance, RBF doesn’t have fixed payments, terms or interest added to the principle.

Instead, payments are flexible in line with monthly earnings. If revenue goes up, payments go up. If revenue dips, payments go down.

These flexible monthly payments are made until the agreed final amount has been paid back.

And unlike equity finance, RBF doesn’t require SaaS businesses to give up equity in their company in return for finance. Instead, they remain in total control of their business, while still getting the cash they need.

Why SaaS Companies are Opting for Revenue-Based Financing

SaaS businesses often face unique challenges with “traditional” funding models.

Because many operate subscription models, their revenue is split between recurring revenue of customers paying monthly, and payments made ahead of service delivery when customers pay 12 month fees in advance.

This can make understanding cashflow difficult, as the business could find itself suddenly generating significantly less revenue if a large number of 12 month subscriptions don’t renew.

It means a perceived increase in risk for banks and VCs.

Bank finance can be difficult to obtain for SaaS businesses because of these risks.

To provide finance, banks will often seek collateral in the form of personal or business assets like a house or equipment.

This puts increased pressure on founders to meet payments.

Bank or debt financing also involves fixed payments and interest.

Again, this can put pressure on SaaS businesses. 

If the business has a bad period of customer churn, their payments will remain the same. 

And it wouldn’t take long for this to put pressure on the balance sheet.

With equity finance, the perceived risk of funding could lead investors to demand a higher stake in the company.

Depending on the level of shares they want, it could severely dilute the ownership of the business in favor of the lender.

For any SaaS founder, sacrificing ownership in their company isn’t desirable, especially if the funding is only needed for a short period.

RBF is the better option for SaaS

Revenue-based finance is a great option for SaaS businesses because it’s suited to companies with a recurring revenue model.

Because payments are linked to monthly earnings (rather than being fixed) it means the amount paid every month adapts in line with the revenue generated.

This flexibility allows SaaS founders to make payments as agreed, without putting extra pressure on their finances if they find revenue dropping for a short period.

It also means the business isn’t incurring interest payments for the period of the loan, which makes the payments more predictable, allowing founders to plan.

"Revenue-based financing is a great fit for a SaaS business because it aligns with the way we operate. Unlike traditional funding, which often relies on fixed assets for collateral, RBF looks at key business metrics like revenue, churn, and NRR to provide a more holistic view of our company. This approach allows SaaS companies to secure the financing we need without the challenges of valuing intangible assets like a codebase or unique processes.

Another SaaS founder I know used RBF to capitalize on a high-performing acquisition channel they discovered. They had a short window to act but lacked the resources to fully leverage it. By securing RBF, they quickly expanded their team and ad budget, resulting in a 50% increase in MRR within a few months. After repaying the financing, they positioned the company for a potential multi-seven-figure sale. For us, the flexibility of RBF—where payments adjust based on revenue—is invaluable, and we're actively exploring the right solution for our needs."

- Daniel Ndukwu, Co-founder at DoxFlowy

Eligibility Factors for Revenue-Based Financing in SaaS

Securing RBF for a SaaS business is typically easier and much quicker than funding through debt or equity models.

The lender and borrower are essentially agreeing on three main points:

The investment needed - The fee for the investment - The percentage of revenue to be paid

When seeking revenue-based finance for your SaaS business, these are the factors an investor will usually consider:

Monthly recurring revenue (MRR)

MRR demonstrates that you have predictable revenue being generated in your business and gives confidence to lenders that you’ll be able to meet your payments. At Stenn we look for businesses to have a minimum of $16,000 MRR.

Annual Recurring Revenue (ARR)

ARR can provide a bigger picture of a company’s financial health. SaaS companies with higher ARR often have reduced customer churn and better retention of customers over longer periods. This can provide additional confidence to finance companies when it comes to revenue-based finance.

Customer retention

Linked to ARR, finance companies will look at customer retention as a key metric when reviewing eligibility. SaaS companies with high customer churn can be a higher risk because they’re more reliant on consistently generating new business.

Customer acquisition costs (CAC)

Although not a major determining factor in whether you’ll be eligible for RBF, how much it costs you to acquire a customer could identify inefficiencies and potential to reduce costs.‍

Growth metrics

RBF investors will be particularly interested in the growth potential of a company as it could become a longer term engagement. Growth metrics should be based on previous financial performance and projections that are realistic, but other factors can play into this, such as:

• Demand for your software
• Your product roadmap
• Partnerships

Steps to Secure Revenue-Based Financing for Your SaaS Business

RBF is generally easier and faster to secure than equity or debt financing. To get funding it’s important you do your research and understand how the process works:

Researching RBF partners

Find a partner who aligns with your business goals and already has experience working in the SaaS industry.

A partner with industry experience will understand the conditions your business operates in and likely offer terms that are better suited to you as part of your agreement.

Prepare your financials

Pull together your MRR, ARR, CAC and LTV numbers to demonstrate your recurring revenues and provide a wider context of your businesses financial health.

If your RBF partner has a clear picture of your current financial position, and you have clear projections, you’ll be more likely to secure favorable terms.

Understand the terms of your RBF agreement

Understanding your terms is essential for meeting your obligations once you receive funding.

Because SaaS revenue cycles can operate differently to other types of businesses you should look to negotiate terms that can adapt with these cycles.

For example, could you negotiate payment terms around your average sales cycle length to avoid putting strain on your finances while acquiring new customers?

Top Use Cases for Revenue-Based Financing in SaaS

Although revenue-based finance can be used in anyway you want within your business, we typically see SaaS businesses using it in a number of key business areas:

Customer acquisition

RBF can be used to increase marketing activity to increase leads and customers. Whether you need to fund higher paid ad spend or want to run specific lead generation campaigns, RBF provides the finance you need to reach more customers.

Product development

If your product roadmap is ambitious and you want to move quickly, RBF can give you the cash needed to make upgrades and add new features quickly. Product enhancements not only help to increase customer retention, it can help with new acquisition if you’re adding features competitors don’t have.

Scaling tech infrastructure

As your number of product users grows, you’ll need to scale the infrastructure in the background to deal with the demand. This could be to accommodate more traffic and data processing demands, scale your networking and security measures or leveraging more cloud infrastructure to improve efficiency.

Recruitment

Finding and hiring the right talent can be difficult in SaaS companies due to competition. RBF can provide the finance you need to increase your recruitment activity to find the best people you need to help you grow quicker.

Finding and hiring the right talent can be difficult in SaaS companies due to competition. RBF can provide the finance you need to increase your recruitment activity to find the best people you need to help you grow quicker.

"I worked with a SaaS client specializing in project management software for construction firms at a pivotal stage of growth. They were hesitant to give up equity or commit to fixed loan payments, so revenue-based financing (RBF) became the perfect solution.

The flexible repayment model eased concerns about cash flow during slower months, and because RBF didn’t require board approval, they kept full control of their business. They used the funds to ramp up customer acquisition through targeted ad campaigns and industry-focused content, which significantly boosted sign-ups. They also strengthened their customer support team, improving response times and client satisfaction, ultimately driving renewal rates and long-term stability."

- Michael Schmied, Senior Financial Analyst at Kredit Schweiz

RBF for SaaS in action

A SaaS business with a monthly recurring revenue (MRR) of $100,000 is seeking $100,000 in capital.

The investment is going into increasing marketing activity to improve customer acquisition. And investment is being made in software upgrades for new paid features.

They agree a fee of 6% with the finance company.

Repayments are made as a percentage of the business's monthly revenue, ensuring flexibility as the revenue fluctuates. Here’s how the payments could break down over several months:

• In the first month, with $100,000 in revenue, the repayment is $6,000.
• The next month, revenue increases to $140,000, and the repayment rises to $8,400.
• A slight dip in revenue to $130,000 in the third month adjusts the repayment to $7,800.
• When revenue grows to $160,000 in month four, the repayment increases to $9,600.
• By month five, revenue spikes to $200,000, raising the repayment to $12,000.
• In month six, revenue climbs to $250,000, resulting in a repayment of $15,000.

At this rate, the SaaS business will have paid the full amount within 12 months of the initial funding.

In reality, the majority of our clients have repaid their full amount back within 5-6 months.

How to Choose the Right RBF Provider for Your SaaS Business

Choosing the right provider for your SaaS business’ revenue-based finance can make all the difference.

Revenue-based finance isn’t a one off funding type, so you’ll want to find a provider you can come back to multiple times.

We would recommend looking at a few points when choosing the right revenue-based finance provider for your SaaS business:

A proven reputation and track record in SaaS

Does your provider have a track record and proven experience proven with businesses using a subscription based payment model?

Do they understand how to assess your financials and the nuances of MRR and ARR when negotiating terms?

If your provider has expertise in your industry already you can lean on this support as you move through your growth phases.

Terms are flexible

Can your provider be flexible with terms built around your sales cycle and provide the finance you need without putting you under pressure.

Make sure they understand your business requirements for funding and how your finances work and can adapt their offering around you.

You can get funded quickly

One of the reasons SaaS businesses choose revenue-based financing is because it’s a fast funding model.

Assess how quickly you’ll be able to access your funds upon your application being approved.

They’re transparent

Honest communication is essential for you and your investor at every stage. Make sure your provider is clear and open about fees, terms and conditions.

You get support through the process

Applying for any type of business finance can feel like a complex process. Does you provider have dedicated customer support on hand who you can contact when you need them, and who’ll respond quickly to your enquiries.

Conclusion

Revenue-based finance is an ideal funding solution for fast growth SaaS businesses who want fast funding without putting themselves under financial strain, and don’t want to sacrifice equity in their business.

With flexible payments that work perfectly around a recurring revenue model, along with fast access to cash and the ability to increase your funding cap once you’ve made your payments, revenue-based finance can be what you need to take your SaaS business to the next stage of growth.

Find out more about how RBF for SaaS businesses helps you scale by clicking here.