By now, you’ve probably heard some of the many reasons growing Software-as-a-Service (SaaS) companies make excellent credit risks for lenders.
These companies have market traction, customers and fixed/predictable revenue. They also have variable costs, meaning that they can scale up or trim their spending as needed to make the best use of the capital they have.
And yet, despite these favorable traits, most traditional banks are uncomfortable lending to SaaS firms due to their lack of traditional collateral to borrow against. Of course, venture capital investors will fund SaaS, but do so by taking an ownership position in the company, which may or may not be the right decision for a company depending on where they are in their growth plan and what kind of valuation they can obtain.
These circumstances have combined to create a sizable demand for debt-based capital waiting to be filled by “alternative” lenders. As a result, there are a growing number of these lenders offering debt-based capital to larger and medium-sized SaaS businesses.
But what about the smaller, younger SaaS businesses?
Assuming their business model is fundamentally sound, these earlier businesses also have market traction, customers and predictable, albeit smaller, amounts of revenue. These companies should also be attractive to lenders, just like their larger cousins. And yet, the sheer demand for capital has led many alternative lenders to set up shop much higher on the ladder.
As a result, there are still very few options for the youngest group of high-potential SaaS companies (under $2M in annual recurring revenue). Here at RSC, we’ve set ourselves up with a special focus on these kinds of companies.
Here are three ways our lending solutions are designed to give more options to small SaaS firms, who are currently underserved in the alternative debt market.
Our revenue requirements are lower
At RSC, our sweet spot for lending is companies with a minimum of $150K in monthly recurring revenue (MRR), or $1.5M in annual recurring revenue (ARR). Often, these are the same companies that are falling below, or just scraping the minimum requirements of other debt-based lenders.
Of course, companies with smaller revenue numbers also have less runway (the amount of time a startup can operate without running out of money) in the event of an unforeseen setback. As a result, interest rates are slightly higher in this revenue range. Still, very young SaaS companies with good forecasting and strong outlooks are usually comfortable with this tradeoff, since debt allows them to keep growing without giving up equity and diluting their ownership so early in the life of their business.
We don’t require previous venture capital sponsorship
At this point, there are a growing number of lenders in the market who can offer competitive interest rates to SaaS companies. However, many of them will still only underwrite a loan for companies who have previous experience with venture capital investors. Typically, these lenders will also include warrants as part of the deal, taking even more ownership out of the company.
A venture capital track record is of particular importance to many traditional “venture-debt” providers, who do not work exclusively with SaaS companies and often gauge the health of a company based on the institutional sponsors who are already supporting it. For lenders like RSC, previous investment from venture capitalists is of less importance—although, we are still well equipped to help our companies prepare for more successful equity fundraising rounds in the future, should they wish to go down that path.
We focus on getting companies quick access to capital
As I mentioned above, younger SaaS companies often have smaller revenue figures, resulting in a comparatively shorter runway than their larger counterparts. That means when they need capital, they need it fast.
Our application process is designed to grant access to capital quickly and efficiently. And, our flexible lending also allows clients to re-borrow against their paid principal, giving them the kind of flexible and revolving line of credit that can really help drive aggressive growth.
To learn more about how River SaaS Capital helps small SaaS companies get capital, visit www.riversaascaptial.com. To find out whether River SaaS Capital’s lending options are the right fit for your SaaS business, fill out our short online application to get the conversation started.