diff --git a/bin/setup b/bin/setup
index 5a3eda882..b89de589d 100755
--- a/bin/setup
+++ b/bin/setup
@@ -65,6 +65,13 @@ setup_database() {
   local label="${adapter:+ ($adapter)}"
   local env_cmd="${adapter:+env DATABASE_ADAPTER=$adapter}"
 
+  # When setting up sqlite in SAAS mode, we need to disable SAAS so that
+  # database.yml will use database.sqlite.yml instead of the fizzy-saas config.
+  # We also unset BUNDLE_GEMFILE so the standard Gemfile is used (without fizzy-saas).
+  if [ -n "$SAAS" ] && [ "$adapter" = "sqlite" ]; then
+    env_cmd="env DATABASE_ADAPTER=$adapter SAAS=false BUNDLE_GEMFILE="
+  fi
+
   if [ "$reset" = "true" ]; then
     step "Resetting the database$label" $env_cmd rails db:reset
   else
diff --git a/config/database.yml b/config/database.yml
index 0229af3e3..d5ab7dbc0 100644
--- a/config/database.yml
+++ b/config/database.yml
@@ -1,11 +1,9 @@
 <%
-  require_relative "../lib/fizzy"
-
   config_path = if Fizzy.saas?
     gem_path = Gem::Specification.find_by_name("fizzy-saas").gem_dir
     File.join(gem_path, "config", "database.yml")
   else
-    File.join(__dir__, "database.#{Fizzy.db_adapter}.yml")
+    File.join("config", "database.#{Fizzy.db_adapter}.yml")
   end
 %>
 <%= ERB.new(File.read(config_path)).result %>