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Whether it's to meet payroll or gain growth capital, seeking financing as a founder, CEO, or CFO is unnerving—and can seem even more intimidating when you’re dealing with SaaS loans.

What Are SaaS Loans?

Borrowing as a Software-as-a-service (SaaS) business is a bit different from traditional businesses. Traditionally, businesses collateralize their loans with their inventory, equipment, and real estate, so in the event of a default, the lender gets some cash by liquidating the collateral. For this reason, physical businesses tend to be more attractive to lenders than SaaS businesses.

Most growing SaaS companies can only boast of intellectual property and accounts receivable; items that a lender doesn’t typically want. Instead, the SaaS business is evaluated based on its potential and earning history (with the potential of the lender taking security in the form of warrants that convert to equity in the case of a default).

Nevertheless, SaaS businesses, whether startups or scaleups, can still access loans from a number of sources. These loan providers rely on the SaaS company's metrics, business model, and projected revenue to determine its creditworthiness.

Here are the types of SaaS loans you can leverage to grow your team, extend your firm’s runway, or whatever else you’re needing a capital injection for. 

How Do SaaS Loans Work?

Most SaaS loans are non-dilutive capital, meaning they do not require you to part with the ownership of your business, as you would in equity financing.

To get SaaS loans, you're banking on the fundamentals of your business (such as CAC, CLV/LTV, MRR, ARR, and customer retention) to approach loan providers for a loan commensurate with your projected revenues.

How To Qualify For A SaaS Loan

Getting a loan is like getting a romantic partner: you need to be yourself… but you need to make sure you look good.

Before you give into the specifics of a potential lender, review these factors to see if your SaaS business looks like a sound borrower:

1. Growth Strategy

Think of your growth strategy like a Tinder profile. It needs to look good at a glance, or else you’ll never get the right swipe. Funding partners want to understand your revenue growth trajectory, and they do this by looking at your unit economics. 

Lenders will pay specific attention to your:

  • Monthly Recurring Revenue to understand your monthly revenues.
  • Customer Acquisition Cost to know how much you spend to acquire customers. A high CAC could be a sign that your customer acquisition expenses might be too high for profitability.
  • Customer Retention Rate to assess your ability to retain customers.
  • Customer Lifetime Value to see how much revenue you extract from your average customer throughout their relationship with your firm.
  • Customer Churn to understand how quickly your customers cancel after subscribing to your product.
Growth strategy infographic

Your metrics look good - you got the swipe. What’s next?

After reviewing initial metrics and profitability at such a high level, lenders will want to dig deeper to understand you a bit better.

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2. Business Plan

They think you look good, so you’ve moved on to messaging. Now, you need to charm them by laying out your story in a way that makes them believe in your future.

Your business plan should show your value proposition, customer acquisition strategy, future projections, and any other information that helps lenders see your growth potential—and ability to repay.

You should also be clear on what you need the loan for. Lenders need to be sure that their loan will help them make money, so they need to know what you plan to use the money for. For example, you stand a better chance of raising money for expansion than to pay off your debts.

Now, you’ve charmed them with a good line or two and moved on to a date. This part takes more time and effort from their end, so you need to make it worth their while.

3. Due Diligence Process

While you’re on your date, they’re going to ask you questions about your history and, if you want this thing to stick, you’re going to need to make sure you’re putting evidence up to bat.

Lenders have due diligence processes to evaluate your business, industry, and loan application. Anticipate your lender's process and burning questions, and be ready with satisfactory answers.

You can make sure of that by:

  • Organizing your metrics and business data for their review.
  • Showing the process you have created to generate leads and win new customers.
  • And really, anything else that transforms the perception of your company from a liability to a profit center.

If you play your cards right, find someone to believe in you, and bring the evidence you need, you’ll have a partner before you know it.

Types Of Debt Funding Options

I’m sure that any SaaS loan could get you the funds you need but the requirements, interest, and repayment schedule of each option will make all the difference down the road.

Convertible Debt

Convertible debt allows you to take a loan that you can repay at maturity, but with the condition that if you raise an equity round before maturity, the lender can convert the debt to shares at a discounted rate (called conversion privilege).

The discount in the event of an equity funding event is usually around 15-25%. The loan’s term sheet specifies the repayment and conversion terms: price per share, the lifespan of the loan, and the interest rate before maturity or conversion.

Convertible debt is more popular among early-stage high-growth tech companies who do not want to give away a piece of their business at its current stage but need capital to grow the business to a valuation that does make sense to sell.

You can access convertible debt notes from angel investors, venture capitalists, and niche lenders. A few examples are Gust, Andreessen Horowitz, and Lighter Capital.

Here’s How You Prepare for Convertible Debt

  • Update your business plan.
  • Prepare a cap table to show the current shareholders in your company.
  • Review the loan’s term sheet to ensure the loan amount, maturity date, interest rate, and conversion terms fit your plans.
  • Be sure your numbers (CAC, LTV, churn) reflect the reality of your business.
  • Consider the likelihood of raising equity financing before the loans mature and whether or not you’d want to give away future equity to save free cash flow.

Working Capital Loan

Working capital loan is a good fit for SaaS businesses in industries with seasonal revenues and constant expenses, such as travel assistance companies. In downtimes, this working capital loan can help you fund your daily expenses (such as payroll, rent, etc.).

Unlike the convertible debt note, this loan is relatively easier to get. It tends to be tied to the business owner’s credit, so you'll need a good credit score to succeed with it. Else, some lenders will insist that you present collateral.

The most common working capital loan option for SaaS companies is Fundbox.

You can increase your chances of getting a working capital loan by:

  • Understanding and articulating what you need the working capital loan for.
  • Defining the purpose of the loan.
  • Organize your financial documents for lenders to review.
  • Review your personal credit history to understand your eligibility for a working capital loan.

Revenue-Based Financing

Revenue-based financing gives SaaS businesses a chance to take a loan based on their future revenue, giving SaaS businesses quick access to funds. They are expected to pay back the loan from the revenue they are anticipating. The monthly repayments are usually a set percentage of your monthly revenue, rather than a fixed amount.

Revenue-based financing is most popular with SaaS businesses with evidence of a regular income.

Lighter Capital provides early-stage companies the funds to grow their business in exchange for a portion of the revenues they generate in a month.

Here's how to prepare for a Revenue-based financing loan.

  • Organize your financial statements for the lender to assess your creditworthiness.
  • Prepare your historical revenue data to show how your business has performed in the last 2-3 years.
  • Present a forecast of your future revenues for the lender to assess your repayment potential.

Accounts Receivable Factoring

Accounts Receivable Factoring helps SaaS businesses access immediate funds based on their accounts receivable. Although many SaaS customers pay subscriptions before services are rendered, current customer subscriptions help to understand revenue expectations from future subscriptions.

It’s easier to get this loan when your contracts state when your account receivable will be fully cleared and thus, when you will receive payment.

Lenders will review your invoices, business fundamentals (customer churn, LTV, etc.), and the credit quality of your customers. If your numbers check out, they'll give you the amount you need in exchange for your accounts receivable. That way, you don't have to wait for your customer's payment to find the money you need to fund your business expenses. The size of your accounts receivable will determine the size of the loan you can get.

A/R factoring is most suited for SaaS businesses that receive payments after 30, 60, or 90 days of service. These businesses need short-term financing to keep business activities going.

AltLine’s A/R factoring loans are a good financing option for SaaS businesses that can't get lines of credit.

Here are the things you need to prepare to attract account receivable-based financing from a lender:

  • A schedule of your A/R
  • The names of the accounts.
  • Billing dates.
  • Amounts owed.
  • Copies of invoices.
  • Any other necessary documentation to validate that the sales are legitimate.

MRR Line of Credit

With an MRR Line of Credit, your SaaS business can get as much as 3–5X of your monthly recurring revenue to finance your business needs. As one of the lowest-cost sources of SaaS business growth, the MRR Line of Credit does require a personal guarantee, which means that you’re on the hook if your business fails to repay.

This loan type is for SaaS businesses with a sizeable and consistent monthly or annual recurring revenue (ARR).

Notable MRR line of credit lenders include Silicon Valley Bank (now owned by First Citizens and, yes, still in existence) and novel capital.

To access an MRR line of credit, your business must

  • Record a churn rate of 15% or lower.
  • Demonstrate positive historical and projected growth.
  • Your firm has to be bootstrapped, venture capital, or angel-backed.

Debt Payment Structures

Whether you pay a fixed monthly amount, give back a lower amount in the first few months to manage your cash flow better, or begin to chip away at your loan from the first payment will be determined by the loan repayment structure. That’s why you have to pay particular attention to the debt payment structure, which could be a:

Standard Installment Loan

With standard installments, you're required to repay fixed monthly installments. The installment covers part of the principal amount and the interest.

Standard installment loans tend to have a clear schedule in place, so it’s easy to tell when you’ll pay off the loan. The lender defines the amortization schedule and determines the amount you pay in each installment.

The duration could be as short as 12 months and as long as 7 years with a minimum of two payments before maturity.

The standard installment loan is the most popular structure on this list. Its ease of repayment and budget-friendliness make it easier for SaaS businesses with stable revenue and cash flow to repay. Lenders also prefer it because it provides them with regular cash flow benefits.

Interest-Only

Repaying your loan with the interest-only option divides the loan repayment into two periods: one period to pay into the interest alone and the other period during which you can begin to pay the principal back. In the second stage, your monthly payment increases to accommodate both aspects of the loan.

Since you’re not paying down the principal in the first period, the total amount owed will remain the same over time. But you can use what you would’ve paid on the principal amount as an investment into your business, whether to excel in growth or increase cash flow.

For most operators, this structure is not preferred unless there’s a clear debt leveraging plan in place.

Step-up Structure

In the Step-up structure, you’ll pay a relatively lower amount in the initial months, with a progressive rise in the payment amounts as your revenue increase over time. It lets borrowers scale their payments alongside their business, so everything is right-sized.

Everything you need to know about repayment terms, including the frequency and amount of the interest increase, is laid out in the term sheet.

Depending on your agreement with the lender, the step-up loan could have a single step-up (one increase) or multiple step-ups (multiple increases) throughout the life of the loan.

One Good Loan Away From Growing Your SaaS Business On Your Terms

Every one of these loan types presents a unique opportunity to grow your business without losing control of it.

Examine them closely to see which one ticks most—if not all—of your boxes. I hope this helps you approach your debt funding better.

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Simon Litt
By Simon Litt

Simon Litt is the editor of The CFO Club, specializing in covering a range of financial topics. His career has seen him focus on both personal and corporate finance for digital publications, public companies, and digital media brands across the globe.