What Are Loan Warrants?
There are a number of financial mechanisms and loan conditions that lenders can utilize to both strengthen and secure their agreements with clients. These include covenants, guarantees, and loan warrants. While these are intended to protect both the lender and the borrower, there is often a fair amount of confusion around them and whether we and other lenders use them.
At River SaaS Capital, some of the most common questions we get revolve around loan warrants. Also known as an equity kicker, a loan warrant is a financial security mechanism that gives a lender the right to purchase stock in a company for a fixed price until a predetermined expiration date. Warrants are typically offered to a lender from a borrower as an incentive in exchange for their funding. Whether that activates this mechanism is dependent on the performance of the borrower and any other details and circumstances of the relationship.
However, what truly differentiates River SaaS Capital from other SaaS-focused lenders (and many others outside of the SaaS industry) is the fact that we don’t take loan warrants. Some SaaS companies that come to us for funding view this as an advantage, while others are surprised and want us to take a warrant in their organization. But we have specific reasons for not doing so and wanted to take the opportunity here to provide clarification.
Why We Don’t Take Loan Warrants
1. It Differentiates Us
We’ll tackle the immediately obvious one: the fact that we don’t take loan warrants is a true differentiator for our organization. There are a number of options for SaaS companies looking to subsidize their operations and goals ranging from angel investors to bank loans. In our space, many of our competitors do take loan warrants. And while River SaaS Capital has the right to take warrants in our venture debt deals, we still choose not to. Here’s why.
2. It Keeps Our Funding Truly Non-Dilutive
While we have recently launched equity-based financing for SaaS, it was important to us that our venture debt financing support remains completely non-dilutive, meaning that we don’t take an ownership position in your company or occupy a board seat in exchange for our investment. Your business remains your business. Equity financing is available to our clients as a complement to our venture debt, but it’s more strategically useful once your company has achieved a certain level of stability and growth. Even if your company is already doing well, we believe in allowing you to guide your organization’s future. We’re just here to support it.
3. It Keeps Things Flexible
By not taking loan warrants, we’re able to partner with more SaaS companies than if we did take them. For example, if your company received funding from an angel investor, it could complicate the relationship by us having the option to immediately take a portion of your equity at any time. That’s simply something we want to avoid. It’s also a business decision in that not taking loan warrants opens the door for more SaaS companies to partner with us, as our counterparts don’t want to work with companies that don’t have equity sponsorship. At River SaaS Capital, we don’t take equity unless it’s an equity-specific funding solution.
4. It Keeps You in Control
The last thing you want in exchange for funding is to have to surrender the direction of the company you’ve worked so hard to build over to a third party. While a warrant doesn’t give a lender a majority stake, it still gives them a say — and that’s an opinion and perspective you’d be obligated to take into consideration. As a SaaS builder or even developer, you know your product and market best. We want our clients to be able to accelerate their goals through our funding — not alter them.
5. It’s About Partnership
We believe in the importance of partnering with our clients. If we took loan warrants for our venture debt financing, our relationship would have a different dynamic. We want to provide support and guidance so that you can grow your organization in the way you see fit. We don’t want to steer you in a direction that you don’t want to go or make you feel that you no longer have a say or control over your business. When you work with us, it’s a true partnership. We’ll provide ongoing advice and support, but you remain fully in control.
So What About the Equity Side?
River SaaS Capital does offer equity-based financing, though this is a separate product for separate needs. Whereas our venture debt financing solution is best used to accelerate sales and marketing efforts, equity financing is best used to sustain operations, prepare the organization for the next phase of growth, and so on. Loan warrants aren’t needed in this product because we do require equity in your organization in order to obtain this financing.
The good news is that our equity financing solution has many of the same flexible requirements as our venture debt financing. Our primary requirement for both financing products is a monthly recurring revenue of $150,000 or more, though there is some flexibility in that if your organization is close to that figure. In both instances, our lending team will work closely with you to understand your organization, current financial performance, and short- and long-term goals so we can best match you with a solution to achieve them.
Let’s Discuss Your Funding Goals
If you have any other questions about loan warrants, our SaaS funding products, or our criteria for investment, we’d love to hear from you. Whatever your goals are, we’ll help you structure a financing solution to support them. Fill out the form below to get in touch with our investment team today.