Recurring Revenue to Support a Line of Credit

Stock market of Brussels
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The Wall Street Journal published an article three days ago titled Royalty Financing: An Alternative to Venture Funding, Bank Loans that mentions some of the challenges I talked about in my post on Junk Bonds for Startups a week ago. The general idea is that startups usually don’t have much need in the way of physical assets to take loans out against (e.g. real estate, heavy equipment, etc) and so when it comes to bank loans they really aren’t available unless you have personal collateral to cover the majority of the amount. Royalty financing is generally taking a percentage of the future revenues as a way to finance a loan.

A line of credit is worth considering for revenue-producing startups. Most of the time it’s tied to the current accounts receivables (monies owed) to the business and a bank will provide a line of credit for 75% of those receivables. The challenge for many SaaS businesses is that they are paid monthly on a credit card resulting in little receivables relative to the size of the business.

SaaS businesses should find a bank that understands recurring contract revenue and will set up a line of credit based on the last 90 days monies received from recurring revenue. For example, technology company-focused banks will do lines of credit for 75% of those monies for profitable companies. Thus, if $1 million of recurring revenue was collected in the past 90 days, the business might get a line of credit for $750,000. A bank line of credit or loan, especially with today’s interest rates, is often the cheapest way by far to finance a business. The challenge is getting it.

4 thoughts on “Recurring Revenue to Support a Line of Credit

  1. David- Great post and good recommendations. I have done a lot of research in this area over the last several monthsand have spoken to dozens of profitable and revenue-producing business with LOC’s (across various banking institutions) and almost all of them (with the excpetion of 1) have a personal guarantee component. To you point – the challenge is getting one without it. If any profitable company can obtain an LOC without a personal guarantee – I think that is superb. I personally haven’t seen this trend at all and am curious to see if it changes in 2011.

    1. Thanks Rachel. I agree that it is super rare. I’ve heard, but not confirmed, that banks like Silicon Valley Bank (svb.com) and Square 1 Bank (square1financial.com) offer LOCs without a personal guarantee if the LOC is large enough (e.g. $500k -$750k, which means a later stage startup).

  2. David – the WSJ article mentioned a few royalty financing funding options, but can you suggest any local banks that might have an appetite for the LOC structure you outlined?

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