Debt funding options for Saas?

Discussions
#1

Hi,

I was wondering if others on this forum have used debt funding to finance investments either in their Saas or elsewhere.

It seems that with the predictable nature of Saas revenue, low interest rate debt should be available for Saas apps with low churn and healthy profit margins.

For example, borrow at 6% on your Saas and invest in real estate at 12% cash on cash. So use your Saas as a vehicle for “good debt” to increase your portfolio more rapidly.

Has anybody gotten low interest rate long term bank loans for his Saas? This seems the only way to get reasonable interest rates, as dedicated Saas lines of credit like mentioned on http://www.saas-capital.com/funding-solutions/faqs/ want 10-12% interest rate with 1% annual point, which seems ridiculously overpriced to me.

Or am I missing a risk in Saas others see?

#2

@pjc Yes, you are absolutely missing risks.

With real estate, you can resell it to cover the debt. With Saas, so much can go wrong. Maybe the tech landscape changes within 5 years, maybe google launches a free version of your Saas. All you customers leave and you have nothing to cover the debt anymore. For a bank, there are many unknowns and things outside of their expertise.
Have a look how many funded Saas shut down after a year or two. They get funding because the investors see an upside, but they would never get an unsecured loan. That is much to risky. Even if they have revenue, a loan equivalent to more than a couple of months revenue is risky for a bank.

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#3

@unboot makes sense, and cap rate is indeed ~30% for small Saas. But then what explains the high revenue multiples publicly listed Saas receive?

So it appears equity investors value Saas revenue highly, but debt investors think it is super risky. For the same size, established Saas companies.

There is a mismatch here.

Edit: The only theoretic explanation of equity investors expecting high enough growth to pay 5-7x revenue multiple while debt investors want hard money type conditions to just borrow you 6 x MRR is that the market (both equity and debt guys) expect Saas to go out of business at a high rate, but if they survive they win so insanely big the expectation still warrants the revenue multiple. It’s the only thing that explains the situation; the market thinks Saas is a gamble basically.

#4

@pjc There is a large difference between investment and providing capital through debt.

One of several differences:

  • Investor: I’ll give you $1, if you go bust I loose, if you become google I get $1million
  • Bank (debt): I’ll lend you $1, if you go bust I’ll loose, if you become google I get $1.12 ($1 principal + $0.12 interest).

Also banks are usually highly leveraged (i.e. for each $ they have, the lend out a large multiple), while investors tend to lend their own money (or that of their clients).

#5

People here have no time for their projects’ never-ending TODO list, and you proposing to add a real-estate business to that? :astonished:

IMHO: SaaS is not a passive income. If you start focusing on your real-estate, chances are your SaaS will nose-dive. It is better to sell it and invest into real estate if it is where your heart is.

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#6

In a year or 2 I may get to the point where the team can run the day-to-day.

#7

In my experience that doesn’t happen. Staff have questions, need direction, need managing, have (both work and personal that somehow become yours too) and sometimes cause problems. When I had staff although the company made more progress I personally felt I had way more work to do than as a solo.

Though in fairness I am not a good manager of people and the team was only small so perhaps once you’re big enough to employ people to manage others they themselves might not need so much managing…

#8

+1 more stuff, more headaches. Unless you hire a professional manager (which won’t work for a two person company and if she does, I’m not sure you will be able to afford her)

I’m dealing with this right now :frowning: