River SaaS Capital Featured in Crain’s Cleveland

Private lender closes its first deal with local software company Banyan Technology

May 22, 2016- River SaaS Capital wants to lend money to software companies — even if they haven’t yet turned a profit.

The new company, a subsidiary of River Capital Finance in Westlake, is hunting for “software as a service” companies that can generate significant recurring revenue, even if they don’t yet qualify for a traditional bank loan.

In January, River SaaS Capital made its first loan to Banyan Technology, a freight management software company in Elyria. And it has “about a half dozen in the pipeline,” said River SaaS president Matt Kennedy. The lender is looking to do deals in this region and in nearby states.

“We’re going to start from here and grow out,” said Kennedy, whose family owns a few local businesses through a holding company called TruWest Co.

River SaaS Capital is part of a trend: A small-but-growing number of private lenders are starting to make loans to startups. These so-called venture debt lenders often look for fast-growing companies that have either reached profitability or can see it on the horizon. Many of the lenders target companies in the software as a service category, which means that they offer their software via the internet on a subscription basis.

That business model makes it possible for those companies to generate reliable, recurring revenue. And lenders like predictability.

What drove River Capital Finance to get in on the trend? The company, formerly known as MRK Leasing, offers loans and leases to businesses in the process of buying material handling equipment — think barcode scanners and other inventory tracking systems — and computer equipment. Occasionally, companies selling those products would send River Capital Finance a SaaS software company looking to finance desktop computers or equipment for a data center.

Those software companies often wouldn’t meet River Capital Finance’s financial requirements, so it formed River SaaS Capital to provide them with loans that will usually range from $500,000 to $1 million, Kennedy said. A few of River Capital Finance’s employees are dedicated to the new subsidiary, which otherwise shares employees and resources with its parent company in Westlake.

Granted, it is riskier to lend money to younger companies that don’t have long track records of profitability or significant physical assets that can serve as collateral. To mitigate that risk, River SaaS Capital’s interest rates are somewhat higher than rates charged by banks, Kennedy said.

It also takes a close look at the borrower’s business. For instance, River SaaS Capital will consider a software company’s growth rate, customer retention rate, gross margins and the quality of the management team, he said. He noted that borrowers will typically have to be generating at least $150,000 in recurring revenue each month.

A test case

A few local companies have raised venture debt over the past year. They include two Cleveland-based SaaS software companies, OnShift and StreamLink Software, and a medical technology company in Oakwood Village, ViewRay.

And then there’s Banyan. The freight management software company was in a good position to serve as River SaaS Capital’s first customer, said Banyan CEO Jim Walborn.

For one, the two companies have known each other for years. River SaaS Capital’s CEO, Mike Kennedy, Matt’s father, serves on Banyan’s board, and multiple members of the Kennedy family are investors in Banyan.

Though Banyan had reached profitability, it needed more capital to speed up its expansion efforts, Walborn said. The money helped Banyan hire seven new sales people and a marketing director.

Why not raise more cash from investors? Banyan, which has 36 employees, wasn’t interested in giving up more shares in the company, Walborn said.

“The greatest asset that we have is our equity,” he said.

But there is one big downside to raising debt: You have to pay it back. Young companies looking to borrow money must be confident that they will be able to make payments.

That issue did cross Walborn’s mind. Banyan took a close look at its track record and projected growth “to convince ourselves that, yes, this is worth the risk.”

“There is some calculated risk to it,” he said.

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