Frequently Asked Questions about Debt-Based Growth Capital

About the SaaS Capital Fund

SaaS Capital is the leading provider of long-term Committed Credit Facilities to SaaS companies. Focusing exclusively on the SaaS business model, SaaS Capital delivers faster decisions, more capital, and longer commitments. SaaS businesses have used SaaS Capital's Committed Credit Facilities, instead of equity, to finance growth and create hundreds of millions in enterprise value without sacrificing significant ownership or control.

The following questions/answers address many of the typical inquiries that we hear from potential portfolio companies and investors who want to know more about our SaaS line-of-credit. Feel free to get in touch if you do not find the information that you are looking for among these FAQ's.

Q. What is "Growth Debt"?

A. A SaaS Capital Committed Credit Facility is uniquely structured to allow a SaaS business to borrow against its future revenue stream. The Committed Credit Facility is based upon a SaaS-specific "borrowing base" typically consisting of either contracted but un-billed future revenue (25% to 35% advance rate), or a multiple of monthly recurring revenue (4 to 7 times). The borrower may draw down capital from the facility as needed (based on the size of its borrowing base) to support its ongoing working capital needs. Each draw is evidenced by a 3-year term loan and any repaid principal can be re-borrowed, so it truly is a revolving line of credit.

Q. Why is growth debt from SaaS Capital a good idea to fund the expansion of my SaaS business?

A. Debt is less expensive than equity and, if structured properly, can allow companies to continue their growth without diluting ownership or losing control of the company. SaaS Capital allows SaaS businesses to bring forward some of their future revenue now to invest in things like Sales, Marketing, or new Product Development. Operating as a line-of-credit, and letting the SaaS Company access capital as they need it can save large amounts of interest income compared to term loan. For more, see How SaaS Capital Helped a Portfolio Company Create $18 Million of Value in 2 Years.

Q. What are the typical terms and conditions of a SaaS Capital revenue loan?

A. The pricing of the facility is company specific, however, rates are typically in the 10% to 12% range and there is a 1% annual facility fee. Covenants are SaaS-specific and cover things like renewal rate and EBITDA (losses). The borrower is also required to establish a collections account with their bank through which all cash is directed. The SaaS Capital loans are senior to all other forms of debt.

Q. What sort of borrowers would be appropriate for a line-of-credit from SaaS Capital?

A: Growing SaaS businesses' with run-rate recurring revenues above $2.5 million are good candidates for a SaaS Capital facility. High renewal rates, strong gross margins, and a stable technology infrastructure are also important consideration. A SaaS company may or may not be venture backed.

Q. How is "Growth Debt" from SaaS Capital different from venture Debt and alternatives from other lenders?

A. Most venture debt financing is provided on a term loan basis that is inappropriate for growing SaaS business. The first disadvantage of the term loan structure is that all the funds are all borrowed at once. This maximizes the interest expense and results in "idle" cash on the balance sheet. Second, after a brief interest-only payment period, the Venture Debt term loan begins to amortize. This accelerates the company's cash burn just months after the capital was initially drawn down. The high amortization results in the need to re-finance the loan (many times within a year or 18 months) with more term debt or equity.

Some banks now offer MMR based lines of credit for profitable or venture-backed SaaS companies. These lines have lower availability (typically 3 times MRR), expire every 12 months at which point they are due or the covenants are re-set, and they typically have balance sheet covenants making it difficult to borrow all the available capital. If your SaaS business has modest, seasonal, working capital needs, a bank MRR or AR line can be a cost-effective solution.

For more information about all your SaaS business funding alternatives, please see SaaS Capital Compared to Other Financing Options

Q. What is the process of getting a loan from SaaS Capital?

A. Please pick up the phone and call. We like talking to SaaS companies, and we learn something new with every conversation. And because we are solely focused on funding the growth and expansion of SaaS companies, we can typically identify good prospects for our product in the first 15 minutes. The initial conversation is typically followed by a review of your financial statements, a discussions of deal terms, and then an on-site visit.

We looked at different financing alternatives to fund our growth including venture capital, venture debt, and commercial banks. SaaS Capital's approach allows us access to the greatest amount of capital with a line-of-credit that provides us flexibility around when we borrow and repay.

Thomas Palmer

Executive Chairman, iModules

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