Accounts receivable is a crucial balance sheet item for businesses as it represents the amount of money that they have invoiced to their customers, but hasn't been paid yet. It's money that the business has but isn't in the bank yet. For most product companies, the process is pretty straightforward. Once the product is delivered, they invoice the customer, and the customer pays them within a 30-60 day period. The process is different for a SaaS company
SaaS Companies are a little different from traditional business and accounting models in a number of ways, but the most significant difference lies in the pre-billing process. When a company signs up for an annual software license, they typically pay the full annual cost upfront, and in return, they receive 12 months of software usage. The software company invoices the client, and the client pays them. Now, in the eyes of GAAP accounting, you have a healthy AR balance, right? Your customer agreed to a price, you invoiced them, and they intend to pay you within the agreed term but they haven’t yet…not quite.
When a business bills upfront for a service (in this case, software as a service) that has yet to be delivered, it’s not considered “earned” in the same way as if you bill in arrears (once the service has been fully rendered). This is a common hurdle SaaS companies run into when looking for financing. They see a healthy, growing AR balance on their books and they seek out financing against the AR to continue funding their growth. Most asset-based lenders who focus on AR really only lend against what they deemed as “earned” - thus billed after delivery of the product or services - leaving traditional SaaS companies in a tough spot.
The good news is that there are numerous non-AR-based lending options available for SaaS companies that provide greater capital availability than AR-based financing. It's crucial for SaaS companies to understand the debt landscape to ensure they're guiding their company down the right path from the onset. By exploring and utilizing non-AR-based lending options, SaaS companies can effectively finance their growth and expansion plans while avoiding the common hurdle of AR financing.
SaaS Companies are a little different from traditional business and accounting models in a number of ways, but the most significant difference lies in the pre-billing process. When a company signs up for an annual software license, they typically pay the full annual cost upfront, and in return, they receive 12 months of software usage. The software company invoices the client, and the client pays them. Now, in the eyes of GAAP accounting, you have a healthy AR balance, right? Your customer agreed to a price, you invoiced them, and they intend to pay you within the agreed term but they haven’t yet…not quite.
When a business bills upfront for a service (in this case, software as a service) that has yet to be delivered, it’s not considered “earned” in the same way as if you bill in arrears (once the service has been fully rendered). This is a common hurdle SaaS companies run into when looking for financing. They see a healthy, growing AR balance on their books and they seek out financing against the AR to continue funding their growth. Most asset-based lenders who focus on AR really only lend against what they deemed as “earned” - thus billed after delivery of the product or services - leaving traditional SaaS companies in a tough spot.
The good news is that there are numerous non-AR-based lending options available for SaaS companies that provide greater capital availability than AR-based financing. It's crucial for SaaS companies to understand the debt landscape to ensure they're guiding their company down the right path from the onset. By exploring and utilizing non-AR-based lending options, SaaS companies can effectively finance their growth and expansion plans while avoiding the common hurdle of AR financing.