Debt is your traditional loan or line of credit. There are filings and the borrower carries a liability on their balance sheet for the duration of the repayment period. A vendor financing program is a non-debt financing facility. The vendor (the SaaS company) has no financial obligation with this program, and their customer enters into a simple leasing agreement with the lender and reports the cost as an operating expense, not a liability.
Revenue-based and asset-based financing facilities (like subscription advance loans and AR factoring) do achieve the same end result of the SaaS company getting additional cash upfront, but require the SaaS company to take on a liability from the lender and carry debt on the balance sheet – vendor financing is a way around that.
Converting Monthly to Annual Customers
When software companies begin to scale, the next step is to convert their original MRR (monthly recurring revenue) to true ARR (annual recurring revenue) through annual contracts. This can frequently come at the cost of churned customers during this period of transition – something incredibly scary for a startup. With a financing option, you can convert your monthly customers to annual contracts without requiring them to pay the hefty upfront annual cost that tends to come with a software agreement.
Allowing customers to continue paying monthly will allow you as the SaaS company to convert MRR to ARR to significantly boost valuation without the risk of having your customers leave due to high upfront costs.
Removing the “Price Tag” Objection
Pricing is one of the most common objections received during the sales process. Losing a sale due to the high upfront cost can lead sales teams to negotiate by cutting costs, costing the company revenue. Rather than losing out on prospective revenue, SaaS companies can offer an alternative to paying for the subscription. Monthly payments on an annual contract can make the cost of a SaaS contract much more manageable, greatly minimizing the pricing conversation from the sales process.
Boost Cashflow with Multi-Year Agreements
Signing multi-year SaaS agreements is always the goal, locking in 2-3 years’ worth of revenue at once gives the sales team and management comfort in their planning. The most common payment schedule for multi-year SaaS agreements is paid annually upfront in advance. That’s great when you get paid, but that could be a 2-3-year period before you as the SaaS company can collect the full value of the contract you just signed.
SaaS companies are using facilities like this to realize the upfront cash value of their multi-year agreements when they actually close the sale. Being able to receive the cash value of the contract upfront, without taking on a debt liability is driving SaaS companies to improve their cash flow and push even more for multi-year agreements with their clients.
Who Should Not Bother with a SaaS Financing Program
SaaS companies that have mostly annual subscriptions and rarely receive pricing objections do not need this program. If your customer base only agrees to sign 1-year agreements and pays upfront, without long net payment terms then you as the SaaS company do not need this program.
This is meant for SaaS companies with monthly subscriptions they are trying to convert to annual, sales teams that receive pricing objections or companies with multi-year agreements that are looking to realize the full value of the contract right away.