Credit Lines for Software-as-a-Service Startups

Now that Software-as-a-Service (SaaS) is mainstream and seemingly billion dollar acquisitions occur on a monthly basis (see Responsys to be acquired by Oracle for $1.5 billion from last week), it’s important to discuss the line of credit options available for these types of businesses. See, most entrepreneurs won’t qualify for a line of credit unless they have personal assets to guarantee the loan (e.g. if you want to borrow $100,000 be prepared to have $80,000 in deposits, real estate, etc. to put up as collateral). SaaS, due to recurring revenue, high gross margin, and the predictable nature of the model makes for a unique business that’s well suited to loaning money based on recurring revenue (even absent free cash flow).

Here are a few thoughts on credit lines for SaaS startups:

  • Credit lines are often based on a multiple of monthly recurring revenue (e.g. 3x) and annualized renewal rate (e.g. 80%) — an example is doing $500k/month in recurring revenue ($6 million annual run rate) with an 80% renewal rate results in a line of credit of $1.5 million * .8 = $1.2 million
  • Covenants are always required, typically around customer renewal rates (e.g. 70%+ annually), growth rates (20%+ annually), gross margins (70%+), and cash collected over the past 90 days (70% of the line of credit)
  • Banks and other lenders want some level of scale to do a deal (e.g. must qualify for at least a $500,000 line of credit as they don’t want to do smaller lines due to the lender’s business model)
  • Square 1 Bank and Silicon Valley Bank both have great programs for SaaS companies
  • Firms like SaaS Capital are emerging that offer smaller lines of credit as well as lines that aren’t as restricted as banks (but have a correspondingly higher interest rate)

Pardot was a major beneficiary of a credit line from Silicon Valley Bank and it allowed us to significantly invest ahead of growth. Once a SaaS startup achieves enough scale to qualify for a line of credit, it’s one of the best ways to finance the business.

What else? What are some other thoughts on credit lines for Software-as-a-Service startups?

4 thoughts on “Credit Lines for Software-as-a-Service Startups

  1. I’ve always thought there’s an opportunity for financing SaaS businesses by purchasing subscriber revenues. In other words, you sell a percentage of your acquired customers for their net present value. There would be credit ratings based on expected curb rates etc, but I think it would be a very interesting market and could solve some of the inherent problems of cash flowing a SaaS business.

    1. Good call. I agree there’s a real opportunity in there to do more sophisticated financing of SaaS businesses.

  2. Start-ups are definitely in a tough situation. If they lack the assets to grow then they need personal collateral to guarantee the loan. Many smaller companies lack the assets in either their personal life or from the business to guarantee such loans. This leads them to either 1) fail or 2) accept cash infusions into their company for high ownership stakes. I would like to see smaller entrepreneurs with good credit history have a bit more access to capital either through private or government funding. I hate to see these young geniuses fail!

    –Averell Luedecker

  3. I realize it varies by market rates and a number of other company specific factors, but what kind of rates do Square 1 and Silicon Valley Bank offer?

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