Why banks don’t get SaaS companies?
Originally posted on seedlify.com by Sam Kawtharani
In the past, companies transformed raw material into products or inventory, then sold them to generate what we call in finance, account receivables (AR). This kind of activity required a fair amount of capital to create hard assets — inventory and AR. So when an entrepreneur or business owner wanted to get some cash from the bank, the bank was more than happy to lend, and felt safe knowing there is a collateral in case the business went bust; meaning a company would liquidate their hard assets and pay back the bank.
While a lot of companies still follow this model, the rise of technology and online platforms is changing the dynamics of how businesses operate nowadays. Say you are a SaaS company looking for some financing. Like most SaaS companies out there, you have a growing customer base with prepaid subscriptions generating stable monthly revenue streams. Awesome, but I hate to disappoint you, it means nothing to a bank.
Do you have inventory? Do you have AR or any other traditional hard assets like property, equipment, or raw material? Nope, and if you are thinking like an entrepreneur, no IP doesn’t count, at least to a bank. Most likely, the person helping you at the bank will just look at you and politely refuse your loan application.
But wait a minute! I have a great business with growing revenues, margins and customer base. Why would a bank miss out on such a great opportunity? Unfortunately, in the real world, there are only two scenarios when a bank will lend to a SaaS startup:
- You are willing to sign a personal guaranty, meaning you put your personal assets (house, car, etc.) on the line. But do you really want to do that?
- You have significant amount of cash in the bank. Wait, you are probably wondering how this makes sense. Believe it or not, several banks would issue a credit line that requires a business to keep as much cash in the bank as you borrow on that credit line.
Banks can’t justify the perceived risk on their balance sheets regardless of the profits they can gain from lending to a SaaS company. In addition, despite the growth of the alternative lending space, SaaS businesses still represent a small share of the overall economy, so banks and alternative lenders prefer to fund the coffee shops, restaurants, and the rest of the mamas and papas shops down the street.
So now what? If you’re an early growth stage company, how do you secure capital? Well there is always the conventional path through angel investors and VCs. While this path works for a lot of companies, it is the most expensive capital out there — these investors are hoping for a 10–50X return on their investment, which makes sense considering the risk. In addition, you will have to be okay with someone else having a big say in how to run your company.
Seedlify and Revenue Based Financing to the rescue
What I just mentioned above is the main reason we founded Seedlify. My co-founders and I believe there must be a better way to make financing and investing in growing tech companies more intuitive. Our revenue based financing investments are tailored for tech businesses with stable recurring revenues and healthy margins. There are no personal guarantees or collateral, and most definitely you don’t give up equity or board control. Repayments are a fixed percentage of your monthly revenues, so payments go up and down based on the performance of your business. As an investor, it provides the opportunity to access robust revenue potential. Mutually beneficial? You bet! At Seedlify we know that when the interests of entrepreneurs and investors are aligned, that’s when true growth begins. You can learn more here.
Don’t get me wrong, I don’t intend to say that banks are horrible for a business — they just don’t understand SaaS businesses. The good news is that Seedlify is here to fill the gap. We understand SaaS and tech companies. We work with you to accelerate your growth on your own terms, while providing investors the opportunity to earn an attractive return. Ready to join? Request your early access today.
Seedlify is Canada’s first revenue based financing investment platform that makes it easy for accredited investors to invest in early growth tech companies. We call it Capital-as-a-Service.