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Loan for SaaS company

With your concerted efforts and hard work, you have launched a great SaaS product. Now you need capital to execute expansion plans In this article, we’ll be discussing where can you get a loan for a SaaS company?

Here’s what you’re going to learn after reading this article

  • Different lending options for SaaS company
  • Eligibility criteria for loan
  • What you can do with the loan
  • Which financing method best suits your business

To prevent your business from running out of cash and prevent cash crunch from hampering growth, stick with us till the end of this article.

Perhaps some of your early marketing techniques are showing results and helped you to launch loyal customers. Being a SaaS entrepreneur, you should dream of competing with the conglomerates like Slack, BigCommerce, Dropbox, and MailChimp. 

You might be earning millions of dollars in revenue. However, there is still room for further room for growth in your business. To execute your aggressive expansion plans, you need capital. Therein the real irony lies.

Many SaaS entrepreneur experiences a cash crunch while growing their business. For this reason, we have decided to nail down all the available options to raise loans for your SaaS Company.

Different Options to Get a Loan for SaaS Company

Venture Debt

Venture debt is by far the most attractive way through which you can get a loan for a SaaS company. Both VC and non-VC-backed SaaS companies can reap the benefit of it. Companies looking to raise capital via venture debt usually contact banks that specialize in venture financing.

Loan Size: $1-10 million

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Loan Tenure: 1-5 years.

What sets it apart from venture debt and other sources of financing is its minimal dilutive nature that’s why it is often acquired by high-growth companies.

Although all the banks and financial institutions specify their own loan structure, usually, it is structured as a term loan along with a fixed interest rate.

SaaS companies can use the venture debt both as a compliment or an alternative to equity financing. The main goal of the venture debt is to inject capital into the SaaS Company. So they can execute their growth and aggressive expansion plans.

Despite receiving the growth capital, a beneficiary of the venture debt retains control over their company.

Uses of Venture Loan

Extend Cash Runaway

Venture loan has a myriad of uses, the most prominent of them all is it helps the SaaS Company to extend their cash runaway and assist them in achieving their growth plan.

To keep that in perspective, suppose that an XYZ SaaS company wants to quadruple their revenue to increase its valuation for the second phase of fundraising.

In this scenario, a small chunk of cash would be sufficient for a company to achieve their milestone without diluting its equity. So, they do not need to raise money via equity financing at lower than expected valuation.

Reduce Equity Dilution

Using venture debt, SaaS companies can avoid and reduce equity dilution. For instance, ABC Company wants $150 million to finance its marketing and sales development expenditure.

Instead of raising $150 million via venture financing, the company decides to raise $120 million via equity-based financing and the remaining $30 million via venture debt. Since the financier of venture debt doesn’t require a stake in the company, companies can reduce equity dilution.

Eligibility Criteria for Venture Debt 

To raise money through venture loans, a SaaS company should have a steady cash flow with an ARR of above $1 million. Aside from that, a company must have a lucrative business model and an impressive growth rate.

Tech Incubators

When it comes to borrowing for SaaS companies, tech incubators are the leading option. Incubators provide opportunities for mentorship, training, and networking. Usually, mentorship and training programs take months or even years. 

Incubators provide a host of benefits to budding tech entrepreneurs. On top of that, you get the chance to meet other peoples who are facing the same problems and are looking for a solution.

Therefore, you could with others on the same problem and come up with an industry-centric solution. Meanwhile, you can also raise a loan for SaaS companies from incubators as well.

Joining an incubator doesn’t guarantee instant success and loans. But you can reap the benefits of networking and mentorship opportunities.

Well-Known Tech Incubators that Provide Loans to SaaS Companies

  • Techstars
  • Y Combinator
  • StartupBootCamp
  • Metavallon
  • Buildit Accelerator
  • Chinaaccelerator

VC Funding

If you have good communication skills and convincing power, then VC funding is appropriate for you. VC can unlock their funds for your business if they expect a growth potential on your SaaS business. In exchange for money, they want a stake in your business.

The biggest setback of VC funding is that their screening criteria for a loan is obsolete. Apart from that, VC firms are often biased in their decision-making process. it is worth questioning here whether the 1950’s model is still relevant today and can keep up with the growing industry’s demand.

As a SaaS-based company owner looking for VC funding, you have to be crystal clear on your product. Explain to these fund managers how your product is providing value for your customer and what are your expansion plans?

In case you have a niche product, make sure to present it to your potential investor as a lucrative business rather than a problem solver.

Angel Investors

Angel investors first gained traction in the 2000s and are somewhat similar to venture capitalist firsts. What sets them apart from VC firms is that they are high net worth individuals rather than a consortium of investors. 

Thus, an individual has the right to make decisions. Since Angel investors are entrepreneurs themselves, they always take to fully grasp your product. 

The downside of angel investors is their lending capacity is relatively low and the funding process can be excruciatingly time-consuming.  

Example of VC firms to Get a Loan for SaaS Company

Here are some VC firms that issue loans to SaaS companies:

  • Atlanta Ventures
  • Sequoia Capital
  • The SaaStr Fund
  • Battery Ventures
  • Ventech

Crowdfunding and Crowd Lending

Crowdfunding platforms like Patreon and GoFundMe is a great option for those SaaS businessmen who can comfortably ask for donations from their existing clients. In most cases, funds generated via these platforms do not have to be repaid.

Your ability to raise money for your business via crowdfunding depends on your marketing campaign and customer satisfaction level.

Companies that Provide Crowdfunding

  • Kickstarter
  • Fundly
  • Indiegogo
  • Fundly
  • Crowdfunder

Revenue-Based Financing 

In revenue-based financing, investors lend you money in exchange for a fixed share in your regular income. 

This financing scheme is insanely effective for those SaaS companies with steady revenue and an impressive growth outlook. Additionally, revenue-based financing is often issued by non-banking financial institutions.

Eligibility Criteria

To raise capital via revenue-financing, a company should have strong bottom-line growth. Apart from that, you need to have a $1 million ARR coupled with strong expansion plans.

 Cost of Capital

Under revenue-based financing, monthly repayment costs could be 5-8% of your monthly revenue. Upon completing loan tenure, borrowers are asked to pay the pre-determined multiple of the initial borrowed amount.

This pre-determined multiple is known as “repayment cap” and can be 1-3 times an initial loan amount. Revenue-based financing best suits those companies aspiring to raise funds for acquisitions and long-term projects.

Benefits of Revenue-Based Financing

Less Equity Dilution

Some SaaS entrepreneurs are not comfortable with handing over their equity to someone else. For those business owners, revenue-based financing could be a viable option as they do not have to dilute their shareholding.

Owners Retain the Control

Venture capitalists become the board of directors of the company, so they dictate the direction of the company without taking into account the promoter’s agenda behind the company. A though this approach is good for some companies, not for all.

In stark contrast to that, in revenue-based financing, owners still have the highest stake in the company so they are free to execute their expansion plans.

Flexible Repayments

SaaS companies that are in the growth phase experience unsteady cash flow and revenue growth. Therefore, borrowing from a bank is not viable for them as they are liable to pay the fixed interest.

On the flip side, revenue-based financing is a great alternative for them as they are only liable to pay a fixed percentage of their topline revenue.

Companies Providing Revenue-Based Financing for B2B SaaS Companies

  • Bigfoot Capital
  • Alternative Capital
  • Decathlon Capital
  • Earnest Capital
  • Feenix Venture Partners

Capital Loans

Banks and non-banking financial institutions often offer working capital loans to SaaS companies. Working capital loans are closely associated with the company’s long-term or short-term account receivables and monthly recurring.

Capital loans are arguably the cheapest and the most reliable way of financing for SaaS companies and can fulfil long to short-term cash needs. They can address the liquidity shortage of a company but are not sufficient to finance large projects.

Generally, SaaS companies get capital loans when they:

  • Start a new marketing campaigns
  • Hire a technical staff
  • Buy inventory/office equipment/furniture

Loan size: $6000

Markup: 8-12%

Loan tenue: 6-18 months.

Eligibility Criteria for Capital Loans 

The financier of working capital expects a significant cash flow and an onboarding of equity investors in your company.

Uses of Working Capital Loans

Generally, SaaS companies seek working capital loans to address a temporary shortfall in working capital. Working capital loans can be used for almost anything.

For instance, a meteoric rise in the demand for SaaS Company’s product due to unforeseen circumstances. For instance, in the Covid-induced lockdown, demand for project management apps like Asana went up dramatically.

If a company does not have sufficient capital to scale its product and to address the customers growing demand, it is likely to seek working capital loans.

However, it is worth mentioning here that working capital loans are not feasible for long-term investments or asset purchases. As there are alternative forms of financing that requires relatively less interest rates.

Eligibility Criteria for Capital Loans

The financier of working capital expects a significant cash flow and an onboarding of equity investors in your company.

Uses of Working Capital Loans

Generally, SaaS companies seek working capital loans to address the temporary shortfall in working capital. Working capital loans can be used for almost anything.

For instance, a meteoric rise in the demand for SaaS Company’s product due to unforeseen circumstances. For instance, in the Covid-induced lockdown, demand for project management apps like Asana went up dramatically.

If a company does not have sufficient capital to scale its product and to address the customers growing demand, it is likely to seek working capital loans. 

However, it is worth mentioning here that working capital loans are not feasible for long-term investments or asset purchases. As there is an alternative form of financing that requires relatively less interest rate.

Example of Companies that Provide Capital Loans

  • United Capital Source
  • TIMIA Capital
  • Tiny Seed
  • Scale Works

What to Consider While Selecting a Lender?

Estimate the Real Cost of Capital

Before applying for the loan, make sure to calculate the real cost of capital associated with the loan and grasp all the deal terms. Make sure to only agree on those terms and conditions that are ostensibly viable for your business in the long run.

Check Existing Investors

Before considering alternative financing options, make sure to consent with your existing investors and stakeholders. Otherwise, you’ll end up with legal issues.

Track Record

While exploring financing providers, try to figure out what additional benefits can they bring to your SaaS business.

Apart from that, you need to know everything about your financiers. Do they have domain-centric knowledge and expertise? Are they supportive of SaaS business and can they add value to other areas of your existing business? 

Lastly, do not forget to examine the past track record of the financier. For instance, in the past have they been open to the restructuring of loans in case of your inability to repay?

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