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.
David Cummings on Startups 
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