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Loan for SaaS company

Where Can I Get a Loan for a SaaS Company?

With your concerted efforts and hard work, you have launched a great SaaS product. Now you need capital to execute expansion plans. This article discusses where you can 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 show results and help you 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 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 a SaaS Company

Venture Debt

Venture debt is the most attractive way to 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 specializing in venture financing.

Loan Size: $1-10 million

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 high-growth companies often acquire it.

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

SaaS companies can use venture debt as a complement 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 the company.

Uses of Venture Loan

Extend Cash Runaway

Venture loan has a myriad of uses; the most prominent of them is it helps the SaaS Company 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 its revenue to increase its valuation for the second fundraising phase.

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

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

Tech Incubators

Regarding 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 work with others on the same problem and develop an industry-centric solution. Meanwhile, you can also raise a loan for SaaS companies from incubators.

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, VC funding is appropriate. 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 are obsolete. Apart from that, VC firms are often biased in their decision-making process. It is worth questioning whether the 1950s model remains relevant and can keep up with the growing industry’s demand.

As a SaaS-based company owner looking for VC funding, you must be clear on your product. Explain to these fund managers how your product provides value for your customer and expansion plans.

If you have a niche product, 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 grasp your product fully. 

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 a 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 are great options 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.

Companies that Provide Crowdfunding

  • Kickstarter
  • Fundly
  • Indiegogo
  • Fundly
  • Crowdfunding

Revenue-Based Financing 

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

This financing scheme is extremely 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

A company should have strong bottom-line growth to raise capital via revenue financing. Apart from that, you need a $1 million ARR and 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 the “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 uncomfortable 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 company’s board of directors, so they dictate the company’s direction without considering the promoter’s agenda behind the company. However, this approach is good for some companies, not for all.

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

Conversely, revenue-based financing is a great alternative 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 fulfill long to short-term cash needs. They can address a company’s liquidity shortage but are insufficient 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 tenure: 6-18 months.

Eligibility Criteria for Capital Loans 

The working capital financier 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 companies’ products due to unforeseen circumstances. For instance, in the Covid-induced lockdown, demand for project management apps like Asana increased 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 alternative financing forms require relatively lower interest rates.

Eligibility Criteria for Capital Loans

The working capital financier 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 companies’ products due to unforeseen circumstances. For instance, in the Covid-induced lockdown, demand for project management apps like Asana increased 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 an alternative form of financing requires a relatively less interest rate.

Examples 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, 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, 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 they can 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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