Why Do Companies Take on Debt? Here Are 4 Reasons - Non-Dilutive Capital for SaaS Companies | River Saas Capital (2024)

Wait, Isn’t Debt a Bad Thing? Then Why Do Big Companies Have Debt?

Why Do Companies Take on Debt? Here Are 4 Reasons - Non-Dilutive Capital for SaaS Companies | River Saas Capital (1)

You’re borrowing money that has to be repaid. You also have to pay interest on that debt, resulting in having to pay back more than what was borrowed in the first place. This can’t be a good thing! So why would companies take on debt when those funds could be applied toward other things like investing in the SaaS product, adding more people to the team, investing in sales and marketing, and so on? What could the benefits of debt possibly be?

Because when it comes to growing SaaS companies, the funds needed for those things often aren’t available. The SaaS model relies on sticky subscribers for a consistent revenue stream. During those first years, SaaS churn can be higher than normal as companies flesh out their model, define and implement customer service/success processes, and continually enhance the product for greater performance and usefulness.

So, when the need for additional funding arises, SaaS companies have few choices. Bank loans require collateral like equipment, property, etc., which SaaS companies often don’t have — or have enough of. Equity financing means giving up a board seat and a percentage of ownership of the company (as well as a chunk of any future sale proceeds).

Debt financing, however, provides funding as a flexible loan — without requiring physical collateral or an ownership position in the company. Of the options available, debt is often the most advantageous for this business type. Let’s explore these and other reasons why companies should take on debt as part of their financial strategy.

Already know debt is right for your business? Talk to a member of our investment team today.

So Why Do Companies Take on Debt? Here Are Four Reasons

1. Debt Financing Keeps You in Control

Why is debt good for a company? We already touched on this, but the value of maintaining 100 percent ownership of your SaaS business can’t be overstated. Whether you’re the sole owner or share ownership with a business partner, your company has a mission and vision — a roadmap for what success looks like and what the vehicle will be to get you there. Keeping yourself (and your business partner or partners) in the driver’s seat ensures that you control the journey toward that destination.

With equity financing, you’ll likely have to give the investor a seat on your board. That means they’ll have a say in the goings-on in your company. Hiring decisions, strategy adjustments, major purchases or expenses, and more will all be on the table.

River SaaS Capital provides non-dilutive venture debt, meaning you stay in control at all times. Learn more now.

2. Debt Can Be Used to Regain Control

If you’ve already secured equity financing support, or if some of your early employees were given company stock as part of their compensation package, debt gives you an opportunity to buy them out. This puts you back in the driver’s seat so you can steer the company in the direction you want.

While having employees with stock doesn’t necessarily mean that they’ll have a say in the direction of the company, it can be a good idea for business owners to have complete control. This is especially true for SaaS businesses that are moving from the growth stage to the scaling stage. You might want to provide an early return to those employees for sticking with you during those first few years. Or it may be worth reducing the reporting requirements involved with additional stock owners as the business moves into the future.

Thinking about venture debt as your next move? We’re here to help. Connect with us.

3. Debt Can Be Your Bridge Between Raise Rounds

If you already have venture sponsorship, you’re likely well aware of the requirements and process for obtaining it. It takes time — usually a long time. Months and months. Sometimes SaaS companies don’t have that much time available. Debt provides an opportunity to extend your cash runway between raise rounds.

If your burn rate leaves you without enough time and funds until more capital can be raised, debt is a worthwhile consideration. Working to increase sales and reduce expenses is also worthwhile, but results are not guaranteed. That’s why companies take on debt — to ensure they’re able to get from peak to peak without getting stuck in the valley between them.

We’ll help you reach your next step. Learn more about our venture debt funding solutions.

4. Debt Makes Sense When Cash Flow is Strong

The previous three reasons explain many use cases of debt for small- to mid-sized businesses, but why do big companies have debt? Why would companies take on debt if they already have sticky subscribers bringing in revenue? Because that doesn’t mean cash flow is strong enough to help those companies move to the next level. It might only be enough to sustain operations, payroll, etc. Or, the current profit rate might not allow them to move forward fast enough to achieve their goals.

In these instances, debt can be used to help the business focus on growth-oriented tasks. Examples include ramping up a SaaS marketing strategy to attract new subscribers and recruiting new sales talent. This is one of the most advantageous uses of debt financing in that it helps move a company forward faster.

We hope we’ve answered all of your questions, but if you’d like to learn more or speak with a member of our investment team, we’re here to help. Contact us today to learn more about our funding solutions.

Take these insights further:

Download our free ebook, How Going Into Debt Can Grow Your SaaS Company.

Why Do Companies Take on Debt? Here Are 4 Reasons - Non-Dilutive Capital for SaaS Companies | River Saas Capital (2024)

FAQs

What is a reason for corporations to use debt in capital financing? ›

Preserve company ownership

The main reason that companies choose to finance through debt rather than equity is to preserve company ownership.

Why do businesses take on debt? ›

Reasons why companies might elect to use debt rather than equity financing include: A loan does not provide an ownership stake and, so, does not cause dilution to the owners' equity position in the business. Debt can be a less expensive source of growth capital if the Company is growing at a high rate.

What are the advantages of using debt in a company capital structure? ›

Debt is one of the two main ways a company can raise money in the capital markets. Companies benefit from debt because of its tax advantages; interest payments made as a result of borrowing funds may be tax-deductible. Debt also allows a company or business to retain ownership, unlike equity.

What are three reasons why companies may choose to invest in debt and equity securities? ›

Companies usually have a choice as to whether to seek debt or equity financing. The choice often depends upon which source of funding is most easily accessible for the company, its cash flow, and how important maintaining control of the company is to its principal owners.

Why do companies prefer debt capital to equity capital? ›

Choosing between debt financing and equity financing - essentially non-dilutive and dilutive financing - depends on various factors. Debt financing provides immediate access to capital while allowing business owners to maintain full control and ownership.

Why do companies issue debt? ›

There are various reasons why a company would look to issue debt, among them raising money to fund investments or projects, or to acquire another business. So some may hope this will led to an uptick in economic activity.

Why do companies offer debt? ›

The benefit of debt financing is that it allows a business to leverage a small amount of money into a much larger sum, enabling more rapid growth than might otherwise be possible. In addition, payments on debt are generally tax-deductible.

What is the major advantage of debt financing? ›

A big advantage of debt financing is the ability to pay off high-cost debt, reducing monthly payments by hundreds or even thousands of dollars. Reducing your cost of capital boosts business cash flow.

Why does Apple have debt? ›

In fact, in this case, it points to Apple's financial prowess. The tech giant started borrowing aggressively about a decade ago to take advantage of ultra-low interest rates. This has helped to fund its buybacks and dividends. Moreover, you'd struggle to find a more profitable enterprise than this one.

Why would a company add debt to its capital structure? ›

Using more debt in a company's capital structure reduces the net agency costs of equity. The costs of asymmetric information increase as more equity is used versus debt, suggesting the pecking order theory of leverage in which new equity issuance is the least preferred method of raising capital.

What is the purpose of debt capital? ›

Debt capital can help founders and business owners cover their operational expenses without diluting their ownership or decision-making power. There are tons of kinds of debt capital you can seek out, but be wary of predatory terms—debt capital always needs to be repaid in-full!

Why is debt to capital important? ›

Companies with higher debt must manage it carefully, ensuring enough cash flow is on hand to manage principal and interest payments on debt. Higher debt as a percentage of total capital means a company has a higher risk of insolvency.

Why do companies use debt instead of cash? ›

Debt financing can be difficult to obtain. However, for many companies, it provides funding at lower rates than equity financing, particularly in periods of historically low-interest rates. Another advantage to debt financing is that the interest on the debt is tax-deductible.

Why do companies have so much debt? ›

It might only be enough to sustain operations, payroll, etc. Or, the current profit rate might not allow them to move forward fast enough to achieve their goals. In these instances, debt can be used to help the business focus on growth-oriented tasks.

Why do companies invest in debt? ›

The ability to borrow large sums at low interest rates gives corporations the ability to invest in growth and other projects. Issuing bonds also gives companies significantly greater freedom to operate as they see fit.

What is the significance of debt to capital employed? ›

The debt-to-capital ratio gives analysts and investors a better idea of a company's financial structure and whether or not the company is a suitable investment. All else being equal, the higher the debt-to-capital ratio, the riskier the company.

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