by Sam Franklin | August 16, 2022 | 9 min read
Full guide to revenue-based SaaS financeGet funded
Last updated: September 03, 2022
If you're a SaaS business, you know that getting traditional funding can be tough. Banks and other lenders are often hesitant to give money to businesses in the early stages of development or that don't have a lot of revenue yet. This is where revenue-based financing (RBF) can be helpful. RBF is a type of debt financing where you borrow money based on your future revenue potential. We'll explain what RBF is, how it works, and who should use it.
Table of contents
- What is revenue-based SaaS funding?
- How does RBF work for SaaS companies specifically?
- Benefits of revenue-based financing for SaaS startups
- Drawbacks of RBF for SaaS companies
- Revenue-based financing vs other traditional options
- Who is eligible for revenue-based SaaS funding?
- How to qualify for revenue-based financing
- SaaS companies can now apply for revenue-based financing
What is revenue-based SaaS funding?
Revenue-based SaaS funding is a type of financing that allows startups to receive funding based on their monthly recurring revenue (MRR). In most cases, investors will provide financial support for a percentage of the company's MRR. This type of funding is ideal for software businesses with a steady stream of recurring revenue and growing at a predictable rate.
On average, sales grow by 50% in six months after taking capital
While it's not as well known as equity-based financing, revenue-based SaaS funding is cost-effective for many startups. You can use this financing to fund growth initiatives, hire new employees, or invest in marketing campaigns. For example, say a SaaS borrowed £350k, it could agree to pay back 10% of its monthly revenue to the lender.
How does RBF work for SaaS companies specifically?
Revenue-based financing is a type of debt financing.
In a nutshell, RBF works in three easy steps:
Step 1: Link your back-end systems (e.g. Stripe) to the lender
Before a revenue-based lender can advance funds to a SaaS company, they need to be sure that the company is generating enough revenue to repay the loan. To do this, the lender will require access to the company's back-end systems. This will allow the lender to see your monthly recurring revenue (MRR) and make an offer based on your projected revenues.
Step 2: Select one of the available offers recommended
In order to continue to secure funding through revenue-based financing, companies will need to select one of the offers suggested by the lender entity. Once an offer is selected, the SaaS will then need to submit an application and set an agreement with all the necessary terms. The loan amount will be based on a percentage of your projected future sales, and you will make payments to the investor based on a percentage of your actual sales.
It would look like something like this:
Funding amount: £420k
Monthly revenue-share: 10%
Avg. monthly revenue: £700,000
Estimated repayment term: 6 months
Step 3: Repay the advance as a % of your SaaS revenue
Once you've agreed to the loan terms, the RBF provider will deposit the money into your account, and you can start using it immediately. You'll then need to repay it as a percentage of your future SaaS revenues. This repayment will be deducted from your future sales until the advance is repaid in full. Remember that the amount you repay will depend on the terms of your agreement, but it will typically be between 5-20% of your total sales.
Benefits of revenue-based financing for SaaS startups
In the world of SaaS, revenue-based financing (RBF) is quickly gaining popularity as an effective alternative to traditional equity financing. And it's easy to see why. RBF provides a number of distinct advantages for SaaS companies, including:
This means that founders and directors can retain a larger ownership stake in the company and won't necessarily have to worry about giving up control of the company to venture capital firms or angel investors. This gives SaaS founders more control over the direction of the company and allows them to keep more of the upside as the business grows.
No personal guarantee
Loan products that don't require a personal guarantee are rare, especially for SaaS companies. But that's exactly what revenue-based financing is: a loan that's based on your company's monthly revenue, with no personal guarantee required. This can be a huge relief for founders who want to grow their company but don't have the collateral to provide a personal guarantee.
Flexible loan repayments
Instead of making a fixed monthly/quarterly payment, SaaS startups can choose to repay their loan based on a percentage of their monthly sales. This gives them the ability to adjust repayments based on the company's financial performance, which is critical when experiencing either sporadic or seasonal fluctuations in revenue every now and then.
Quick turn around, low friction, and little admin
No need to go through the lengthy and complicated process of traditional bank loans or SaaS venture capital funding, which can take between three to nine months to close, according to Capital Raising 101 by Elizabeth van Rooyen. And because it's based on your company's revenue, it's easy to qualify and get the money you need quickly - usually within 24 hours. Plus, there's very little paperwork and admin involved.
Good fit for fast-growing enterprise software companies
The reason is simple: the faster a company grows, the faster it will repay the loan.
Way to go for SaaS businesses expecting rapid growth!
Revenue-based financing is not just a one-time shot in the arm; it can also play the role of an ongoing financial management strategy. That's because RBF lets you tap into your future revenue stream to get the capital you need when you need it, without giving up private equity or debt. Additionally, revenue-based financing can be part of a financial management toolbox, allowing you to deal with unexpected costs or take advantage of opportunities as they arise.
Lower cost than equity
Repayments are often lower than interest rates, making them more affordable in the long run. Equity can be expensive, and it's not always easy to secure angel investors or venture capital.
Complements other funding sources and optimises capital stack
It makes equity and loans better suited for large, risky, multi-year projects. Equity is better for a pre-revenue startup, and revenue-based financing just makes sense for marketing financing.
Drawbacks of RBF for SaaS companies
Before partnering with a revenue-based financing provider, consider this:
A regular stream of revenue is required
One potential con of revenue-based financing is that a regular revenue stream is required to make regular payments. This can challenge early-stage companies with sporadic or irregular revenue and/or inconsistent financial history.
Significantly smaller loan amounts
What happens is that lenders usually base the amount they're willing to lend on your business' monthly recurring revenue (MRR). So, if you're a relatively small SaaS company, you may not be able to get as much money as you need compared to venture capitalists or angel investors. But, as MRR grows, you may be able to secure follow-on funding rounds from RBF investors.
Not suitable for long repayment periods
The biggest reason for this is that the payments are based on a percentage of monthly revenue, so if the company experiences a slowdown in growth, the payments will also decrease. This can create a situation where the loan is not paid off in the expected months, which may be unsustainable if your repayment period is too long. So, in case you're planning on taking out a loan for more than a year, a bank loan is potentially more cost-effective.
Revenue-based financing vs other traditional options
Unlike traditional loans, this type of funding doesn't need to be repaid if the company fails to reach its sales goals on time. Plus, it's a great way to get started with your SaaS business without putting up any collateral or taking on debt. When it comes to financing, there are a few different options to choose from. But, not all options are created equal. Ultimately, it all depends on the business's specific needs and goals. Let's see them now.
With debt financing, SaaS businesses take out loans from investors or banks and then repay that debt over time with interest. The advantage of debt financing is that you don't have to give up any equity, but you're on the hook for repayment even if your business fails.
Equity financing is when you sell a company share in exchange for capital. The main advantage of this method is that you don't have to repay the money – which is a good option for SaaS companies that have massive growth potential but may not have the cash flow to make regular payments just yet. It also means giving up a portion of control over the company.
Who is eligible for revenue-based SaaS funding?
The main types of eligible projects for funding are SaaS and subscription-based tech companies as well as eCommerce businesses. The most important thing to keep in mind when applying for SaaS funding is that you need to have a demonstrable track record of success. This means that you'll need to have a solid customer base, as well as a proven revenue stream.
Venture capital firms, angel, and RBF investors like Bloom see these types of startups as having a more predictable income stream, and they're also seen as being more scalable.
How to qualify for revenue-based financing
These are the five main criteria to qualify for revenue-based financin6g:
At least 12 months of trading history
More than £10K of monthly sales
A SaaS or subscription-based business
Registered company in the UK
Being over 18 years old
If your SaaS business meets all five of these criteria, then you should definitely consider revenue-based financing with Bloom as a possible option.
And here are the steps involved in getting a revenue-based loan:
You borrow money from Bloom for a percentage of your future revenue.
Then make monthly payments to Bloom based on your company's revenue.
And once you've repaid the loan in full, you no longer owe anything to Bloom.
SaaS companies can now apply for revenue-based financing
Revenue-based SaaS funding is a new and growing trend in the world of financing for startups to get the money they need to grow their business. It's different from other options like VCs, and it has some benefits worth considering. If you're a startup with a subscription-based product, revenue-based financing may be the right option.
Sam founded his first startup back in 2010 and has since been building startups in the Content Marketing, SEO, eCommerce and SaaS verticals. Sam is a generalist with deep knowledge of lead generation and scaling acquisition and sales.