SaaS startups often burn through cash and generate high revenue. These businesses can eventually become profitable and rapidly expand their margins once they get beyond breakeven. However, it can take a while for SaaS companies to stop generating net losses.
SaaS financing acts as a bridge between the company’s early days and profitability. You can get the capital you need to set the foundation, maintain operations, and fund growth initiatives. SaaS business owners can use several types of loans.
Are There Any Financing Solutions Specific to SaaS Companies?
SaaS companies can use a variety of financial solutions. These are some of the most popular choices.
Revenue Based Financing
Revenue-based financing allows you to receive a lump sum payment for your SaaS company. You must then make a monthly loan repayment based on a percentage of your company’s gross revenue for the month. This financing option offers more flexibility since you can make lower payments when your business doesn’t make as many sales.
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Pros:
- Flexible repayment
- Some lenders are more lenient with credit score requirements
- Get quick funding
Cons:
- Monthly payments will increase if your gross revenue increases.
- Lenders will have a minimum annual gross revenue requirement.
- You can end up paying far more than the loan’s amount if your company’s revenue significantly increases during the loan’s term.
Typical loan amount and terms:
- $25,000 to $10 million
- You have to pay 2% to 10% of gross monthly revenue
Common Requirements and Qualifications:
- Minimum annual gross revenue
- Credit score requirement in some cases
Internal Funding
Not everyone needs to check in with a bank, credit union, or online lender to fund their SaaS startup. Some business owners have accumulated enough internal funds through their connections, a lucrative career, or another route. This option is the quickest but also leaves you with less capital.
Pros:
- Quick access
- No interest or fees
- No credit score requirement
Cons:
- You will have less capital for other expenses
- Not everyone has enough capital for this option
- You will not build credit by paying yourself back
Typical loan amount and terms:
Depends on how much you have available
Common Requirements and Qualifications:
None. You just need to have enough funds in your bank account.
Traditional Bank Loans
Traditional bank loans can take longer to obtain than revenue based financing. These loans typically have competitive rates and terms, but you will have to make a fixed monthly payment. Not every SaaS founder has the flexibility to make consistent monthly payments. However, it offers stability within your budget, and you will know what loan expense is coming your way at the end of each month. Banks have several requirements related to your credit score, debt service coverage ratio, years of experience, and other factors.
Pros:
- Competitive rates and terms
- Monthly payments are fixed, which makes them more predictable for budgeting
- Choose from many banks, credit unions, and online lenders
Cons:
- SaaS revenue fluctuations don’t bode well for fixed monthly payments
- It can take longer to get a loan
- Several requirements
Typical loan amount and terms:
- $250,000 to $1 million
- 3-10 years
Common Requirements and Qualifications:
- A good credit score
- Debt service coverage ratio
- Minimum annual gross revenue
- At least 1-2 years of business experience
Venture Debt Financing
Venture debt financing is a short-term funding solution in between venture capital rounds. This type of financing does not involve giving up any equity, but it’s not meant as a long-term solution. The amount you can borrow from venture debt financing depends on how much you borrowed from your most recent round of venture capital financing.
Pros:
- You do not have to give up additional equity
- Potentially receive a significant amount of capital
- Faster than equity financing
Cons:
- The term is short
- The amount of capital you receive depends on the recent equity round
- Potentially higher interest rates than other financing products
Typical loan amount and terms:
- 20%-40% of the most recent equity round
- 1.5-3 years
Common Requirements and Qualifications
- Venture equity round
- Credit score and income
- Good business plan and model
Revenue Term Loans
Lenders will not charge a fixed interest rate but will receive a percentage of the company’s revenue moving forward. These loans have terms ranging from 4-10 years and are only considered repaid if the lender receives enough funds to cover the multiple. For instance, if a lender establishes a 1.5x multiple and lets you borrow $100,000, then you must repay $150,000 for the loan to be considered repaid. These multiples typically range from 1.5x to 3x.
Pros:
- You do not have to give up equity and can get this loan without making a personal guarantee
- Flexible monthly payments
- Quick funding
Cons:
- Pay a percentage of gross revenue
- The established multiple can make this financing option more expensive than other choices on this list
- Higher revenue translates into higher monthly loan payments
Typical loan amount and terms:
- 4-10 years
- 1.5x to 3x multiplier
Common Requirements and Qualifications
- Minimum annual gross revenue
- Potentially, a credit score requirement and a minimum of years of experience
A/R Factoring
A SaaS founder can receive capital equal to a portion of the company’s accounts receivable. AR consists of invoices that have not yet been paid. This approach doesn’t require that you have good credit, and you won’t have monthly loan payments. However, you will have to sell a portion of your accounts receivable for a lower face value.
Pros:
- You do not have to give up equity
- No credit or revenue requirements
- Quick funding
Cons:
- Limited capital
- You will receive a lower face value for your invoices
- The A/R factoring company handles communication with your customers to get the invoices paid
Typical loan amount and terms:
- A percentage of your accounts receivable
- No term length
Common Requirements and Qualifications
The factoring company will assess the creditworthiness of the customers on your invoices.
MRR Line of Credit
A monthly recurring revenue line of credit is for SaaS companies that generate recurring revenue from their businesses. Companies can secure capital based on the predictable nature of their business models.
Pros:
- Receive capital based on your monthly revenue
- Quick funding
- You do not have to give up equity
Cons:
- Typically, higher interest rates
- Access to less capital if your SaaS company loses members
- High minimum loan size
Typical loan amount and terms:
- 1-5 years
- $1 million – $3 million
Common Requirements and Qualifications:
Minimum annual recurring revenue
What Can You Use the Funds for a Loan in Your SaaS Business?
Small business owners can use capital for various expenses for their SaaS startups. You can use capital to maintain operations and explore new growth opportunities. Many SaaS companies need to achieve higher growth rates to move closer to profitability. These business models often rely on scalability to reach key financial milestones.
Allocating capital toward advertisements and marketing campaigns can attract new customers for your business. Acquiring one customer can result in steady monthly revenue for many years if your SaaS solution has a high retention rate. You can also use financing to hire additional workers who can serve more customers and launch new initiatives sooner. SaaS companies have many moving parts, and getting the right loan makes it easier to put everything in place for growth.
SaaS founders can also use the capital to launch new products. Adding a new feature to your software can help you charge higher prices and offer members additional choices. You can offer multiple payment plans. The lowest payment plan will retain members on tight budgets, while higher payment plans can increase your company’s average value per customer. Some SaaS founders may even be in the position to acquire another SaaS startup that complements their current business.
Steps to Secure a Loan for Your SaaS Company
You can follow these steps to secure a loan for your SaaS company.
1. Preparing for SaaS Financing
Compare different financing options and look at their requirements. Lenders will state which documents they need from you. Common document requirements include your ID, articles of formation, proof of revenue, necessary licenses, and a business plan.
2. Finding the Right SaaS Financing Partner
Online business owners should compare many partners before choosing the right one. You can reach out to lenders, venture debt firms, factoring companies, and other potential partners. Explore multiple choices so you end up with the best financing partner for your long-term objectives.
3. Negotiating the Financing Deal
You will get more attractive rates and terms if you can demonstrate that you are a low-risk borrower. Demonstrate your SaaS company’s financial health and long-term growth plans when negotiating for a better deal. Reaching out to multiple partners will strengthen your leverage since you can mention other offers you have received.
Conclusion: What is the Right Financing Solution for Your SaaS Business?
SaaS business founders can choose from many financing solutions. Some financing options do not involve giving up any equity. However, you may have to make fixed monthly payments that remain a fixture in your budget. Business owners can also consider revenue-based financing for more flexible monthly payments tied to their company’s performance.
It’s important to explore all of your choices instead of rushing for the first type of financing option that sounds attractive. You should also shop around and compare partners to ensure you get the best possible deal. Business owners should consider how they would like to repay the loan and how much capital they need. SaaS founders with more experience and higher annual revenue will have more opportunities to access additional capital. However, it’s possible for any startup founder to get the financing they need to grow their companies.
