7 types of working capital financing for SaaS businesses

Miguel Fernandez
Miguel Fernandez
Co-founder & CEO
Posted on
June 29, 2023
min read
7 types of working capital financing for SaaS businesses

Working capital is one of the most important things a SaaS company needs to grow and gauge its financial health. It can be used to cover day-to-day operations, seize growth opportunities, and navigate unexpected expenses. However, it can be challenging to ensure you have a constant supply of working capital—especially when your business is just starting out, is dealing with a tight budget, or is battling a challenging economic environment. 

While there are plenty of ways to increase your saas working capital without resorting to debt, VC, or other outside sources of cash, sometimes, the best option is to seek out working capital financing. The following article will go over what your working capital financing options are as a SaaS business and how to choose which financing option to use. 

What is working capital?

Working capital is the liquid capital your company has on hand to pay for short-term obligations and sustain day-to-day operations. It can be calculated by subtracting your total liabilities from your total assets. Your working capital can include both cash and assets that are expected to convert into cash within the next year.

Another element of gauging your SaaS working capital is your “current ratio” or “working capital ratio”, which can be calculated by dividing your assets by your liabilities. This will produce number lower or greater than 1. In general, the higher the number, the better your business’s finances are, and the more money you have to deal with expenses.

To learn more about calculating working capital and your current ratio, check out this article.

What is working capital financing?

Working capital financing is any business financing option that enables you to get more working capital. This can include anything from traditional financing options, such as venture capital or debt financing, and options that are specific to working capital financing, like working capital loans. 

Working capital financing is usually used in cases where a business cannot generate enough working capital from its existing cash flow and revenue. This may occur during heavy growth periods that require an extra injection of cash to fund important projects, or during downtrends when the cost of day-to-day operations outpaces the revenue the business takes in. 

The importance of working capital for SaaS startups

For SaaS businesses, working capital is the fuel that powers all their operations. It provides the liquidity required to cover recurring expenses, such as payroll, rent, utilities, and software. Working capital also allows companies to capitalize on growth opportunities, such as investing in cutting-edge technology, entering new markets, or scaling their workforce.

Different businesses across various industries rely on working capital to sustain their operations, and SaaS companies are no exception. However, high-growth SaaS companies, especially those that are just starting out, have an increased need to access working capital.

Because of the hyper-competitive, growth-oriented environment most SaaS startups are in, working capital can become absolutely crucial to finance customer acquisition costs, invest in research and development, and support aggressive marketing and sales campaigns for new products.

Without adequate SaaS working capital, a startup may struggle to maintain enough momentum to support its aggressive growth trajectory and effectively compete in the market. 

Types of working capital financing for SaaS

So what are your options if you need to inject some extra working capital into your business? Here are the most popular sources of working capital financing for SaaS companies. Many of them are the same methods you would use for general funding

1. Crowdfunding

Crowdfunding works by asking a large number of individuals to contribute small amounts of capital to your business. It is typically done through crowdfunding platforms like Kickstarter, SeedInvest, or Indiegogo.

Crowdfunding is a popular method for SaaS businesses to raise capital of all kinds and is most popular for seed-phase startups that are trying to get their business off the ground. It is especially effective when launching a new product or service, as it helps validate market demand and generate early customer engagement. Crowdfunding platforms also provide an avenue to showcase your business, attract investors, and gain exposure.

However, it requires a compelling pitch and marketing efforts to stand out among other campaigns. Additionally, crowdfunding may not be suitable for ongoing SaaS working capital needs, as it is typically used for specific projects or product launches.

For this reason, crowdfunding may be an effective way to generate working capital only if you’ve already successfully used the method in the past and have an established base of investors ready to back you again. It can also be effective if you have a strong online presence and can carefully plan a marketing strategy that maximizes reach and engagement.

However, given the work and effort required to gain momentum with a crowdfunding campaign, it typically isn’t worth it for companies that are more established and have access to other means of generating capital. 

2. Equity financing (venture capital)

Equity financing, usually through venture capital firms, is a common method for SaaS startups to secure working capital. It works by exchanging an ownership stake in the company for liquid capital that can be used to invest in anything from new projects and research to operational expenses. 

This type of financing is suitable for SaaS businesses with significant growth potential. Venture capital firms not only provide capital but also bring industry expertise, mentorship, and valuable connections to help accelerate growth. This means that equity financing involves more than just taking the money and leaving—it’s a permanent partnership that will have a major impact on the trajectory of your business.

Securing equity financing involves pitching your business to venture capital firms, and showcasing your market opportunity, product differentiation, and growth potential. The due diligence process typically involves a thorough evaluation of your team, technology, market, and financial projections. Successful funding rounds are followed by legal negotiations and the issuance of shares or equity instruments.

Some of the downsides of equity financing are that it dilutes ownership and control, and the process can be time-consuming and highly competitive. It also generally results in massive funding rounds that are meant to take your company to the next level, so it’s not always the best option when you just need a small amount of capital to get through a slow period or to pay for an unexpected expense. Because of this, it’s best suited for businesses that need permanent, high-intensity support. 

3. Venture debt

Venture debt is a debt-based financing option tailored for high-growth SaaS companies. It provides SaaS working capital without diluting ownership and is usually offered by the same entities that offer equity financing.

Venture debt is often used to supplement equity financing rounds or bridge the gap between funding milestones—making it practical for businesses that need temporary support in extending their working capital. It can also be easier to acquire than equity financing, especially for businesses that need to fund specific projects or routine expenses rather than the big-picture growth initiatives required in VC equity pitches. 

On the downside, while venture debt can provide a capital boost, it comes with higher interest rates and potential restrictive covenants compared to traditional bank loans. This means that it’s best suited for SaaS businesses with a strong revenue base and a clear path to profitability that can ensure they can pay back the full principal and interest within the correct timeframe.

Securing venture debt typically involves demonstrating a solid track record of revenue growth, strong financials, and a clear plan for deploying the borrowed capital. Lenders evaluate the company's creditworthiness and assess the ability to generate sufficient cash flow for repayment. Negotiations involve determining loan terms, interest rates, repayment schedules, and any collateral requirements.

4. Working capital loans

One of the most straightforward and least confusing ways of acquiring working capital is to get a  working capital loan. These are essentially regular business loans that are tailored to address working capital needs specifically. They can be obtained from banks, credit unions, or online lenders, and provide a lump sum of funds with a typical repayment process.

Working capital loans are suitable for various scenarios, including managing cash flow fluctuations, investing in marketing campaigns, or funding expansion plans. The pros include a flexible usage of funds, quick access to capital, and a streamlined application process. However, interest rates, repayment terms, and loan amounts vary depending on the lender and the business's financial profile, which may introduce some downsides if your business has difficulty qualifying or if the terms are unfavorable.

The process of securing a working capital loan involves submitting a loan application, providing financial statements and business projections, and demonstrating the ability to repay the loan. Lenders evaluate creditworthiness, business performance, and collateral options (if applicable). Once approved, funds are disbursed, and repayment begins based on the agreed-upon terms.

5. A business line of credit

A business line of credit offers SaaS companies a predetermined amount of funds that can be accessed as needed—essentially like a credit card. Unlike the other methods listed, a business line of credit provides increased flexibility, which can be a powerful advantage for businesses that have long-term but inconsistent working capital finance requirements, such as businesses with seasonal business models, fluctuating revenue, or fluctuating operating expenses.

A business line of credit can help to manage cash flow gaps, purchase new inventory, cover unexpected expenses, or a variety of other routine expenses. It may be less useful for businesses that need a large sum of cash to fund growth and expansion.

One of the main advantages of a business line of credit is that you only pay interest on the amount you withdraw, making it a cost-effective solution. However, the approval process may involve collateral or personal guarantees, and interest rates can be higher than traditional loans. 

Securing a business line of credit involves applying to financial institutions or online lenders. Lenders assess the company's creditworthiness, revenue history, and financial stability. Once approved, you gain access to the line of credit and can withdraw funds as necessary. Repayment terms vary, and you have the flexibility to use and repay the funds as your business requires.

6. Revenue-based financing

Revenue-based financing, or RBF, is a unique working capital financing option gaining popularity in the SaaS industry. A bit of a hybrid between a credit line, a traditional loan, and venture capital, revenue-based financing allows a company to receive upfront capital in exchange for a percentage of future revenue until a predetermined repayment cap is reached. 

With revenue-based financing options like Capchase Grow, you get approved to access a certain amount of capital instantly, but you can draw as much or as little cash as you need over the course of your term to cover your working capital needs. The amount of capital you have access to can also change as your business grows since it is based on your ARR. RBF also offers flexibility in repayment, as the amount repaid adjusts based on revenue, and no equity dilution occurs

Some downsides of revenue-based financing include that it requires your business to have a relatively stable recurring revenue model and at least a few months' worth of financial records. This means that it’s not suited for extremely early-stage SaaS businesses that aren’t yet taking in revenue. RBF also offers less total capital than equity financing, making it ill-suited for businesses that need large sums of capital.

Securing revenue-based financing typically involves presenting your business's financial metrics, revenue projections, and growth potential to specialized RBF providers. These providers evaluate the company's financial health, recurring revenue streams, and customer retention rates. Once approved, funds are disbursed, and repayment begins as a fixed percentage of future revenue.

7. Invoice factoring

Invoice factoring is a less traditional working capital financing method suitable for SaaS companies with outstanding invoices from their customers. In this approach, you sell your unpaid invoices to a factoring company at a discount. The factoring company provides you with an immediate cash advance based on the invoice value and handles the collection process from your customers. This helps unlock working capital tied up in unpaid invoices and improves cash flow. However, the discount applied to the invoices reduces the overall amount received.

To secure invoice factoring financing, you need to engage with a factoring company that specializes in your industry. They evaluate the creditworthiness of your customers and the quality of the invoices. Once approved, you submit your invoices to the factoring company, and they provide you with an advance typically ranging from 70% to 90% of the invoice value. The factoring company then collects payment from your customers, deducts their fees, and provides you with the remaining balance.

Because invoice factoring involves sacrificing total revenue, can involve complicated and long contracts, and often results in a higher total cost than business loans, it is typically not recommended if you have access to other financing options. However, if you have an excess of unpaid invoices and are in a pinch, it can be a good way to temporarily boost your working capital.

Generating working capital through increasing revenue

Of course, the best way to increase working capital is to generate it on your own through increasing sales and revenue while cutting expenses. In addition to avoiding unnecessary debt or equity dilution, this has the added advantage of improving your overall financial health.

Unfortunately, this is easier said than done, and if you’re looking for working capital financing, you’ve probably exhausted all internal tactics to cut expenses and boost cash flow. However, one strategy you may not have tried yet is B2B BNPL.

B2B BNPL solutions like Capchase Pay allow SaaS companies to receive the full value of an annual or long-term contract upfront while allowing their customers to make payments in installments. This can produce a variety of benefits that lead to increased cash flow and working capital, including:

  • Boosting conversions and renewals without requiring major changes to your product, business model, or sales process.
  • Speeding up your sales cycles and reducing pricing-associated negotiations.
  • Opening your product up to a wider pool of customers.
  • Increasing ACV and LTV, while decreasing CAC.

To learn more about how B2B BNPL can help you boost working capital without financing, download this free ebook.

Boost your working capital with Capchase

Increasing your working capital is essential for the financial health and growth of your SaaS business. With sufficient working capital, you can seize opportunities, navigate unexpected expenses, and fuel your company's expansion. 

Whether you’re looking to boost your working capital through increasing revenue or through getting outside financing, Capchase can help with our two powerful tools: Grow and Pay. 

  • Capchase Pay is a B2B BNPL solution built specifically for SaaS businesses that can help you increase total revenue, sales, ACV, and working capital.
  • Capchase Grow is a revenue-based financing solution that enables you to unlock the future value of your recurring revenue streams. With Grow, you can access the working capital you need without diluting equity or taking on additional debt. 

To see how much capital you can gain access to based on your current ARR, try out our runway calculator.