Understanding SaaS Financing

Understanding SaaS Financing
Industry-specific financing is often the best choice for those whose businesses don't follow the traditional bricks-and-mortar models. Therefore, it's no wonder that those in the SaaS field look for companies that specialize in SaaS finance. These companies know that inventory doesn't have to be tangible to be valuable, and that there are more measures of success than the number of physical units sold. This is essential since in most SaaS businesses, there are no physical units to sell.

How Is SaaS Performance Measured?

Some SaaS finance accountants say it's important to look at what are called the Bessemer 5 C's of Cloud Finance to determine a company's overall health, as well as whether it can survive a financial recession or depression. These are:

  1. Committed Monthly Recurring Revenue (CMRR)
  2. Customer Acquisition Cost Payback Period
  3. Cash Flow
  4. Customer Lifetime Value (CLV)
  5. Churn and Renewal

Most of these seem self-explanatory but can do with some expounding to make them clearer. This is because they're not all as simple as a single number that's already on your books.

Committed Monthly Recurring Revenue

Committed monthly recurring revenue is a figure that is relevant to companies that sell their SaaS services on a monthly subscription basis. It is combined with monthly recurring revenue, churn, new bookings, downgrades, and upgrades to predict future monthly revenue. One-time fees usually aren't included in this figure.

Customer Acquisition Cost Payback Period

Acquiring new customers costs money, whether through advertising, direct sales activities, or other means. The CAC payback period is simply how long it takes for a new customer acquisition to pay itself off and become profitable. Most businesses hope to break even as soon as the customer buys something, but the time period may be extended for services sold under the subscription model. Then, a payback period of 5-12 months is common.

Cash Flow

In its simplest definition, cash flow is the amount of money coming in vs. the amount going out. However, a company's survival during a downturn will depend, either in part or heavily, on the burn rate. A burn rate occurs when more money is going out than coming in, and it is common during economic disturbances such as that caused by the arrival of Covid-19. The amount of reserves a company has plays a big role in how long it can lose money before it is forced to close its doors.

Customer Lifetime Value

This is how much money, or profit, a company can expect to make from each customer. Factor in how long people usually remain customers to get this figure, instead of assuming that they'll all stay forever. There are a few methods that can be used for arriving at a good figure for this variable.

Churn and Renewal

While every business would love permanent customers, it isn't something that happens in reality. Subscribers drop off, and if they aren't replaced by new ones, the time will come when there aren't enough customers to keep the business running. Therefore, finance companies will want to know how many subscribers leave compared to how many come onboard every month.

Key Financial Statements

Financial companies may rely on certain key financial statements instead of, or along with, the Bessemer performance indicators.

The Balance Sheet

The balance sheet may also be called the income statement or other names. Regardless of its title, its purpose is to show a snapshot of the company's digital assets, subscribers, and other financial positives; its liabilities; and its equity. It will also typically list the company's expenses over the last year, or another time period specified by the prospective lender.

This document also typically forecasts its future activities, including changes in subscriber numbers (positive or negative), expected revenue from each user, and churn rate. Since it's impossible to know the future with certainty, companies may offer a variety of scenarios that may play out.

Sensitivity Analysis

In this document, future-looking scenarios are gone into in more detail, based on changes in specific variables. Sometimes, this is called a "what if analysis."

Discounted Cash Flow Valuation

This calculation is done by factoring all expected future cash flow against the time value of money. In the SaaS industry, arriving at this figure is fairly simple due to the use of the subscription model.

Other Factors to Consider

Keeping tabs on the numbers that pertain to your business isn't just important for getting SaaS financing. It's also important for you. Therefore, you should pay attention to more than what cloud finance companies will look at. Build a SaaS financial model that takes into account expected growth factors, milestones you aim to reach, and even what type of team(s) you'll need to build to accomplish your objectives. This will help you stay on track and better spot when something isn't going the way you thought it would (whether better or worse).

Find a Lender who Understands SaaS

Even with everything in line, if you don't have a lender who understands how SaaS works, it will be far more difficult to obtain financing. A lender that expects to be able to use physical product calculations will often be baffled when presented with a company selling a product like DropBox. Avoid this issue by looking for a SaaS or cloud-specific lender.

5th Line Capital for SaaS Financing

5th Line Capital offers services for strategic financing, assisting firms with building business plans for long-term growth. We can help with SaaS financing, debt restructuring, and more. For CFOs looking for financial strategy assistance, consider our customer financing program. As part of the program, we will help set up a third-party financing facility where your customers can enter fixed-term leasing agreements with lenders to make payments for your product or software. This will result in increased sales conversions and boost cash flow to your business. Reach out to us today to learn more about how we can assist your SaaS company with customer financing.