Business Idea: SaaS Line of Credit Provider

There’s a void in the market for high gross margin recurring revenue businesses to get a line of credit based on the recurring revenue. Banks are designed to lend money when you don’t need it (e.g. very profitable) or when you have assets to put up as collateral (a friend of mine got an SBA-backed bank loan for $1.2M to buy some franchises and had to put up $800k of personal money into a CD that the bank held until the loan was repaid).

The most common assets for collateral are accounts receivables, real estate, and heavy equipment. Software-as-a-Service (SaaS) companies shouldn’t have any of those. Accounts receivables, especially if the majority of customers pay by credit card, are almost non-existent as the customer payment is made on a regular, timely basis (e.g. monthly). A SaaS startup’s appetite for capital is even more acute due to the fact that the “services” part of SaaS results in effectively leasing the product over the life of customer, as opposed to receiving a lump-sum of money up-front like with enterprise software. This clearly impacts cash flow and is made more difficult due to the cost of sales commissions and providing on-boarding and training services. SaaS companies are doing well if after 12 months of having a client they break even. Typically, it isn’t until years two and three that they start turning a profit.

The business idea is a technology fund that provides lines of credit to SaaS companies. Here are some details:

• The amount of capital is dependent on several factors including: monies received from recurring revenue in the past 90 days, gross margin, customer renewal rate, customer contract length (if any), and more
• The fund has a core amount of capital that is then leveraged up with a third-party loan
• Members of the fund’s management team must have technology experience and be willing to take over a SaaS company that doesn’t meet its obligations (the SaaS companies are using their business as collateral)
• The idea is riding two waves: lack of sophistication from traditional banks to lend against recurring revenue without hard assets and the proliferation of small SaaS companies that aren’t venture backed

There’s a clear opportunity in the market for a business like this and I hope entrepreneurs step in and fill the void.

What else? What do you think of the idea?