Demand For Debt-Based Capital Is Heating Up, But Which Lender Is Right For You?

It’s no secret that debt is a rapidly growing alternative to equity in the software as a service space. Lately, even long-established private equity (PE) firms are getting in on the action—firms like Cleveland’s own Riverside, a 30-year old PE heavyweight who just announced the launch of a nationally focused fund that will lend to fast-growing enterprise software companies.

Having multiple firms stepping up to meet this demand is great news for these early stage companies—especially away from the coasts, where entrepreneurs are starving for more capital than any one investor or lender could ever provide on their own. Whether it’s debt, equity investment or some combination of both—it’s “the more the merrier” as far as we at River SaaS Capital (RSC) are concerned.

Still, there are some key differences between our work here at RSC and some of the other key players in the market. With that in mind, here are a few questions to help narrow down the right option for you.

Are You an Enterprise or SaaS Firm?
Enterprise software firms sell their product to consumers who then install them on their own systems and use them. SaaS software is usually “rented” and accessed via the internet. Firms can dabble in both types of software and both models can be wildly successful.

Here at RSC, we focus primarily on the SaaS business model because the subscription fees these companies bring in gives them a sturdier, more predictable source of revenue, even as they are scaling their operations. Assuming they have a core group of steady customers, even very young SaaS companies are in an excellent position to take on, and pay back the kind of short-term debt financing we offer.

How Young Are You?
Most fast-growing software companies are young, but we specialize in those that are still considered too young for many of the current players in the debt-financing market.

For example, right now we’re targeting borrowers with a minimum of $150,000 in monthly recurring revenue (MRR) or $1.5 million in annual recurring revenue (ARR).

Contrast our sweet spot with a firm like Riverside, whose ideal borrower starts at around $1.5 million in ARR and runs all the way up to $15 million.  The point is, while there might be a little overlap, for the most part we’re looking at different companies who need different things at different times.

Do You Prefer 100% Non-dilutive Capital?
Some venture debt or alternative debt lenders require warrants as part of their financing, allowing them to buy a stake in the companies they fund at a predetermined price. Occasionally, lenders may also seek to obtain some rights to invest in the borrower’s subsequent equity round on the same terms, conditions and pricing offered to its investors in those rounds. So while they may not be taking equity outright, there is still some ownership dilution taking place.

At RSC, many of our potential borrowers are looking to minimize their dilution or avoid it altogether. In fact, many borrowers seek us out as a bridge—allowing them to scale their sales and marketing operations and develop a more robust client base (and a higher valuation) for their next equity raise. Our flexible terms loans are large enough to help these companies grow, but small enough to pay back quickly with no long-term impact on ownership stake or any future venture capital financing.

The reality of any rapidly growing company is that they are under near-constant pressure to manage cashflow. This is especially true for a growing SaaS company. To scale effectively, they must balance the important strategies of customer acquisition with figuring out when the ideal time to fundraise is, and whether that fundraising will come in the form of equity or debt.

Luckily, more options are becoming available every day.  To learn more about the current state of venture debt in Northeast Ohio, check out this feature from Crain’s Cleveland Business.

To learn more about the kinds of companies we are looking for at RSC and find out whether you may be a fit for our fund, click here.