Debt can be a powerful accelerator for SaaS businesses—but only if used wisely. In a recent conversation with Spencer Brown of SG Credit Partners, we explored the critical nuances that every founder should understand before seeking debt financing.
Debt Is a Growth Tool—Not a Lifeline
Many founders think of debt as a lifeline when times are tough. But according to Spencer, that’s exactly when not to use it. Debt is best applied when you’re on a growth trajectory—when your product is working, your market is clear, and you just need more capital to fuel the fire.
When Is Debt a Real Option?
If your company is under $1M ARR, debt isn’t typically an option. Between \$1M and \$5M, a few revenue-based lenders might offer small facilities—usually around 10–25% of your monthly recurring revenue. Once you hit $5M ARR, non-bank lenders come into play. For banks, you often need closer to $10M ARR and positive cash flow to qualify.
The Bank vs. Non-Bank Breakdown
- Bank Debt:
Cheaper interest rates (Prime +0 to +2%), but banks require profitability and excellent historical performance. - Non-Bank Debt:
More expensive (Prime +4 to +8%) but flexible on profitability and willing to underwrite based on future growth—if your data backs it up.
Data Is Everything
If you want to raise debt, you must know your numbers. This includes:
- Weighted sales pipeline and historical conversion rates
- CAC and retention metrics
- Gross vs. net revenue retention
Without this data, not only will lenders hesitate, but you may not be ready to scale responsibly.
Understanding Debt Structures
Non-bank lenders typically provide term loans with interest-only periods (6–18 months), followed by amortization. Some may require warrants—equity-like instruments—while others, like SG Credit, offer truly non-dilutive capital.
Repayment generally happens in one of three ways:
- A liquidity event (sale or acquisition)
- Reaching profitability and repaying from cash flow
- Refinancing with a bank once you’re more mature
Watch Those Covenants
Loan covenants—agreements to hit certain metrics or maintain certain financial conditions—are binding. If you break a covenant, you’re in technical default. That’s why proactive communication and conservative forecasting matter. Lenders want to work with you, not against you—but they also expect accountability.
Final Thoughts
Debt isn’t bad—it’s just misunderstood. Used correctly, it can help founders grow faster without diluting ownership. Used recklessly, it can sink a business. So build relationships with lenders early, understand the terms deeply, and only borrow when you know exactly how to put that capital to work.
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How to Scale and Grow a SaaS Business
