As a technology entrepreneur, you’re no doubt familiar with the acronym SaaS, which stands for “Software as a Service,” a model that offers access to software by subscription rather than for purchase. While this concept is increasingly popular, it does present certain challenges. In this series of articles, our tech advisors look at the financial challenges inherent to this model and identify possible solutions.
The challenge
Subscription billing presents some challenges in financing day-to-day operations. Since clients have to pay to access the software, there is virtually no lag between billing and payment. As a result, SaaS companies generally have no accounts receivable on their balance sheets. Moreover, given the intangible nature of the software, there is also no inventory on the balance sheet.
Although these are advantages, the fact remains that traditional financing tools, specifically lines of credit, are not at all adapted to this reality, because borrowing capacity is generally limited to 75% of accounts receivable and 50% of inventory. This type of tool is therefore of little interest to companies with a SaaS business model.
Some financial institutions now offer SaaS lines of credit, which present the advantage of determining borrowing capacity based on a multiple of the monthly recurring revenue.
Possible solutions
It is critical for tech companies to have short-term financing that’s in tune with their situation. Here are some best practices to keep in mind:
- Have a line of credit that gives you the borrowing power you need based on your volume of recurring revenue.
- If you can’t get a SaaS line of credit, opt for an operating line of credit with no limit on borrowing power since the amount you can use varies monthly depending on the company’s inventory and accounts receivable. However, for smaller amounts, it’s possible to avoid this restriction.
- Your accounting systems must allow for a quick month-end close and clearly identify monthly recurring revenue. In addition, certain conditions may apply to SaaS metrics. So it’s important to make sure your systems can also produce this information in a timely manner.
Companies that wish to use this type of model have a number of key performance indicators they can look at to assess their situation. However, they have to know which ones are relevant to their business.
To get financing that takes into account your recurring revenue model, you can look to our team to guide you through each stage in the life cycle of your business.