Weighing your SaaS financing options

SaaS businesses have financing needs just like other companies, but securing funding can be more challenging for SaaS due to the nature of the industry. The good news is that financing your SaaS company doesn’t have to require jumping through endless hoops or waiting months for the funding to go through. Here’s a look at the most common financing options for software-as-a-service businesses—and why revenue financing is a game-changer for SaaS.

Barriers to traditional debt financing for SaaS 

SaaS businesses often face an uphill battle with traditional bank loan funding. Traditional financial institutions want to lend to businesses with a demonstrated history of financial success and strong growth potential, but many banks don't understand the software-as-a-service industry. Since the key financial metrics for SaaS companies differ from those for other businesses, and they often don’t fit the predetermined qualifications banks use to measure the potential for success. 

Because banks are so averse to risk, they tend to impose strict lending criteria to minimize exposure to losses. As a result, banks are often hesitant to extend credit to smaller SaaS companies—and if they do, it may be at a higher rate, or they may require owners to personally guarantee loans. While banks often want collateral to secure a loan, SaaS companies usually don’t have the types of hard assets traditional financial institutions are looking for. Additionally, the underwriting process for bank loans is typically lengthy, making it difficult for companies to access capital quickly. 

Drawbacks of venture debt financing 

As an alternative, many SaaS companies turn to venture debt financiers that specialize in SaaS and are familiar with its key financial metrics. 

Interest rates are often higher with venture debt than with traditional bank loans, making it more costly to borrow. However, the cost is still usually less than traditional equity fundraises. Venture SaaS funding can also include warrants (potentially diluting your ownership) in addition to repayment of principal and interest. 

Financial covenants are another downside to venture debt financing for SaaS. These agreements require companies to hit key SaaS finance metrics to continue to access capital. Those that don't perform as expected may face a steep rise in interest rates or even be forced to repay the entire balance immediately. As a result, SaaS companies may find themselves focused solely on pleasing their lenders rather than achieving their own strategic goals.

There are other downsides of venture debt that you need to be aware of before you borrow. Having SaaS debt on your balance sheet could scare away future investors, especially if you're operating under strict financial and operational covenants. You may also need to increase the frequency of your financial reporting as a part of the agreement, which can mean more work for an already busy accounting department or increased costs for hiring outside accountants. Finally, venture debt often takes longer to secure than a bank loan and is generally only available to companies that have raised a venture capital equity round.

Recurring revenue financing with Pipe: A solid alternative for SaaS funding

SaaS revenue financing is an alternative to bank loans and venture debt. Revenue financing converts a company's revenue streams into up-front capital.

Revenue trades on Pipe’s capital platform offer an alternative to traditional financing. Companies with predictable revenue streams can sign up and connect in minutes and receive a trading limit in as little as 24-48 hours. Once approved, you can view your portfolio of revenue streams and invoices and trade any amount, up to your trading limit, for up-front capital straight your bank account. Funds are repaid automatically as those revenue streams come in, with no impact on your customers.

Revenue trading offers many benefits for SaaS companies, including:

• No dilution: With revenue trading, there’s no dilution, leaving you free for full rounds of financing in the future.

• No restrictive covenants: Revenue trading won't place unnecessary restrictions on your SaaS company, leaving decision-makers in full creative, operational, and financial control.

• Maintained agility: Without restrictions, your company can adjust to meet shifting market conditions and customer needs.

• No interruption for subscribers: Trading your revenue streams doesn't impact your customers’ experience—they continue to pay and enjoy your services the way they always have.

• Quick access to capital: You can sign up for Pipe in minutes and securely connect your accounts, with approval typically completed within 48 hours of connection. Once approved, you can begin trading right away and get instant access to cash.

Is SaaS revenue financing right for you?

One of the biggest benefits of using an alternative financing platform like Pipe for SaaS funding is flexibility. Virtually any healthy business with predictable revenue, from startups to publicly traded companies across a wide range of industries, may find recurring revenue financing to be a good fit.

Consider these factors as you weigh your SaaS financing options:

• Your assets: If you own assets like real estate free and clear, you may qualify for secured loans through traditional banks. Companies without hard assets are more likely to need alternative financing.

• Your future goals: If you have a clear-cut vision of the future, you may wish to avoid the covenants that come with venture debt—especially if you're considering adding new lines of business. If a round of equity financing is on the horizon, recurring revenue financing is a great way to extend your runway and position yourself for the best possible equity raise.

• How urgently you need funds: If you needed access to capital yesterday, recurring revenue financing can help you gain access to funds more quickly than traditional bank loans and venture debt.

What to look for in SaaS revenue financing 

If you decide recurring revenue financing might be the right fit for your SaaS business, here’s what you need to know before you enter into an agreement with an alternative financing provider—and how Pipe’s platform measures up:

• Will the financing continue to meet your needs in the future? As your company grows, your funding needs may also increase, so look for an option that grows in response to increases in your annual recurring revenue, giving you access to additional capital.

• What are the costs to sign-up? With Pipe, you can sign up and get approved for a trading limit absolutely free. 

• Are there obligations to trade? Some financing options may lock you into an “all-or-nothing” approach or may charge a “maintenance fee” if you have an account but don’t take financing. Pipe doesn’t require you to make any trades—you can sign up for free to see what investors are willing to pay for your revenue streams, with no obligation to make a trade—and no hidden fees if you choose not to.

• What is the application processing time? The processing time for different funding options will vary—if you need quick access to capital, check the average processing time before you sign up. You can sign up for Pipe in minutes and securely connect your accounts. Approval can be completed in as little as 48 hours.

• What is the processing time? Find out up front how soon you can access funds. When you need to move quickly, fast access to funds is crucial. When you make a trade on Pipe's platform, the funds will hit your bank account the same business day.

• Are there limitations on trading? Pipe allows you to trade as many contracts as you wish (up to your trading limit) as often as you need.

• Is the platform compatible with your SaaS finance software? Finance providers will need access to your accounting software and billing subscription manager software as well as view-only access to your bank accounts. Some platforms won't allow you to sign up if your current software isn't compatible with their system. Pipe is compatible with most software and if yours isn't on our list, reach out and we can help you get connected.

Your pipeline to fast funding

Pipe was created to help SaaS companies scale on their terms without dilution or restrictive loans. Our trading platform enables you to turn your predictable revenue streams into an asset and access the capital you need fast—without losing creative control of your company or diluting your equity. Learn more about our platform, and start Piping revenue today.