As the CEO or CFO of a UK-based SaaS company, you’re familiar with the unique funding challenges your business faces.
Traditional financing options often fall short, leaving you caught between diluting your equity or grappling with inflexible loan terms.
However, there is a potential solution called: revenue-based financing.
This guide will walk you through the essentials of this innovative funding model and how it can help propel your company’s growth.
Understanding Revenue-Based Financing for SaaS
Revenue-based financing is a funding method tailored to the SaaS business model.
Importantly, SaaS finance offers non-dilutive capital investment.
Unlike traditional loans with fixed monthly repayments or equity financing that requires relinquishing a portion of your company, revenue-based financing aligns repayments with your monthly revenue.
Here’s how it typically works
A lender provides you with a lump sum, and in return, you agree to pay back a percentage of your monthly revenue until you’ve repaid the initial amount plus a predetermined (royalty) fee. This percentage usually ranges from 3% to 5% of your monthly revenue.
For instance, if a SaaS startup secures £500,000 in revenue-based financing, they might agree to repay 5% of their monthly revenue until they’ve paid back £750,000. In high-revenue months, they’ll repay more, and in slower months, they’ll repay less.
Lenders receive a monthly repayment that represents a mix of capital and royalty.
Funding amounts tend to range from £100,000 to £2 million. This model suits SaaS companies particularly well due to their predictable, recurring revenue streams and high gross margins.
The Advantages of Revenue-Based Financing (RBF)
Revenue-based financing offers several key benefits that make it an attractive option for SaaS firms:
- Non-dilutive funding: You retain full ownership of your company, unlike with equity financing. This aspect is particularly valuable for founders who’ve worked hard to build their business and want to maintain control.
- Flexible repayments: Your repayments adjust automatically with your revenue, providing a safety net during slower months and preventing cash flow issues.
- Quick access to capital: The application and approval process is often much faster than traditional bank loans or venture capital rounds. Many providers can supply funding within a week of application.
- No personal guarantees: RBF doesn’t normally require personal guarantees, reducing the risk to your personal assets.
- Aligned incentives: Lenders are motivated to see your revenue grow, as it means they’ll be repaid faster. This alignment often leads to valuable introductions and support beyond just funding.
However, it’s important to weigh these advantages against potential drawbacks. The cost of capital is normally higher than traditional bank loans, and if your revenue grows very quickly, you may end up repaying the funds faster than anticipated. Always consider your growth projections and compare multiple funding options before making a decision.
explore revenue based financeQualifying for Revenue-Based Financing
To be eligible for revenue-based financing, your SaaS company needs to meet certain criteria:
- Minimum revenue: Most UK lenders require at least £100,000 in annual recurring revenue (ARR). Some may have higher thresholds.
- Growth rate: Lenders want to see a strong growth trajectory. A monthly growth rate of 2% or more is often expected.
- Customer retention: Low churn rates are essential. Aim for a net revenue retention rate above 100% and a churn rate below 5%.
- Gross margins: High gross margins (typically 60% or above) demonstrate the efficiency and scalability of your business model.
- Operating history: While requirements vary, most lenders prefer companies with at least 6-12 months of operating history.
UK-based lenders may also consider factors such as your customer base diversity, contract lengths, and the overall health of the SaaS market in your specific niche.
To assess your readiness for revenue-based financing, consider:
- Is our monthly recurring revenue (MRR) consistently growing?
- Do we have a diverse customer base, or are we overly reliant on a few large clients?
- Are our customer acquisition costs sustainable relative to customer lifetime value?
- Do we have clear plans for how we’d use the funding to drive growth?
Positive answers to these questions indicate that you’re well-positioned to benefit from revenue-based financing.
The Application Process
Securing Saas Finance is faster and more straightforward than traditional funding methods.
Here’s what you can expect:
- Initial enquiry: Reach out to a debt advisory broker with basic information about your company.
- Data sharing: Provide access to your financial data. This often involves connecting your accounting software and payment processors to the lender’s platform.
- Review and offer: The lender will analyse your data and, if you qualify, provide a term sheet outlining the funding amount, repayment percentage, and cap.
- Due diligence: If you accept the initial offer, the lender will conduct a more thorough review of your business.
- Funding: Once approved, funds are typically transferred within a few days.
The entire process often takes just 1-2 weeks, significantly faster than the months required for venture capital or traditional bank loans.
Key documents you’ll need include:
- Financial statements (balance sheet, profit and loss, cash flow)
- Customer metrics (acquisition costs, lifetime value, churn rates)
- Bank statements
- Shareholder agreements
For UK companies, be prepared to provide additional documentation related to your compliance with UK financial regulations.
How to Use Revenue-Based Financing
RBF capital can be used as you see fit, there are no restrictions.
So this could be for further software development, marketing or staffing costs.
Other Funding Options
To make an informed decision, it’s essential to understand how revenue-based financing compares to other funding options available to SaaS companies:
Venture Capital
While VC can provide larger sums and valuable connections, it requires giving up equity and often comes with pressure for rapid growth. Revenue-based financing allows you to retain full ownership and grow at a more sustainable pace.
Bank Loans
Traditional bank loans have lower interest rates but require personal guarantees and may not provide the flexibility needed by growing SaaS companies. They can also be challenging to secure for early-stage businesses, with many lenders needing to secure the loan against property.
Venture Debt
This option combines elements of VC and debt financing. It’s typically only available to companies that have already raised equity and often comes with warrants, which can lead to future dilution.
Crowdfunding
While popular for B2C products, it’s less common for B2B SaaS companies. It can be time-consuming and may require giving up equity to a large number of small investors.
The Future of SaaS Financing
The SaaS financing landscape is evolving rapidly. Here are some trends to watch:
- Increasing specialisation: We’re seeing the emergence of lenders focused exclusively on SaaS companies, offering more tailored products and services.
- Integration of AI and machine learning: These technologies are being used to improve underwriting processes, potentially making funding decisions even faster and more accurate.
- Hybrid models: Some providers are beginning to offer combinations of revenue-based financing and equity investment, providing more flexible funding options.
- Focus on sustainability: There’s growing interest in funding models that promote sustainable growth rather than the “growth at all costs” mentality.
Revenue-based financing offers a compelling alternative for SaaS companies seeking growth capital.
Its alignment with the SaaS business model, combined with the flexibility and speed it offers, makes it an option worth considering.
As you evaluate your financing options, take the time to thoroughly assess your company’s financial health, growth trajectory, and long-term goals.
For further advice or guidance, please call us on 020 3556 9137.
Need some help?
If you need business finance then a specialist debt advisory broker is a good place to start. You will get expert help and advice along with a wide range of lenders to choose from.
To speak with a specialist broker, please call us on 020 3556 9137
