Over this past year I’ve talked to several Software-as-a-Service (SaaS) startups that have over $1M in annual recurring revenue (ARR), raised an angel round, but aren’t convinced they want to go the venture capital route. On the financing side, once SaaS startups have about $3M in ARR, banks like Silicon Valley Bank and Square 1 Bank have great credit lines based on recurring revenue (e.g. 3x monthly recurring revenue times (MRR) annual renewal rate), but there are few options for companies in the $1M – $3M ARR range.
There exists a gap in the market for high interest loans to SaaS companies to help them grow faster without raising outside capital. Here’s how it might work:
- $750,000 fixed-rate two-year interest-only loan at 20% annual interest rate for a total of $1.08M payable at the end of two years
- $1M+ ARR startup hits $4M ARR at the end of year two, thereby qualifying for a $1M bank line of credit (assume 3x MRR), and then pays back the high interest loan
- High interest loan provider makes a good return, the tech-focused bank gets a new customer, and the entrepreneurs create more wealth without giving up more equity
With this model, that startup has the opportunity to grow faster than it would otherwise and avoids more dilution. The high interest loan provider would need to be very comfortable with the SaaS model and a plan would need to be in place in the event the loan couldn’t be paid back after 24 months.
Look for more models like this to emerge that provide funding for SaaS startups that have the start of a great business but don’t have the scale to qualify for a bank line of credit.
What else? What are some more thoughts on early SaaS loans before bank credit lines?