Heard about recurring revenue finance yet? It's new. Be on the forefront of this one.
When it comes to funding for SaaS (Software as a Service) businesses, sometimes there can be a heavy emphasis upon equity finance. This means the usual route every founder is familiar with - creating & styling the perfect pitch deck, readying your financial model, shareholders’ agreements, subscription letters, the whole 9 yards.
Traditionally for SaaS firms it can be difficult for them to secure non-equity (i.e., debt) funding, especially if they are early on in their journey. Limitations to the current lending environment around SaaS firms are often that lenders & banks aren’t fully familiar with the space, fear customer churn, and prefer to lend to businesses with assets that are easily sold - so more a preference towards machinery & vehicles than bespoke software products.
However, there are signals of a new incoming lender to the UK, specifically tailored to SaaS firms and businesses with Monthly Recurring Revenue (MMR).
If you haven’t already guessed who it is we’re talking about: it’s Pipe - a US-based lender which offers capital to firms based on upcoming subscription revenues.
Pipe looks to treat SaaS subscriptions as an asset which their investors can lend against via their platform. So, as an example, if you’re a SaaS firm and you have a number of customer contracts each with a minimum term of 12 months; then those contracts can be considered a guaranteed source of incoming for the business which investors can use to get comfort and security on their lend.
While creatively applied to the SaaS industry (or any businesses with recurring revenue models), this is really just a novel play on a traditional financing product: invoice finance - which is a kind of catch-all name for any kind of financing service which uses a company’s receivables as security to give them cash in advance.
Different, however, to invoice finance is that invoice finance does not usually provide funding for invoices which are to be issued or for work that has not yet been completed. On this basis, most typical invoice finance providers would be unlikely to look favourably upon a company’s balance sheet which is made up of recurring revenue from subscription services not yet performed.
It’s important because there isn’t any kind of lender like this currently in the UK. The incoming positioning of Pipe in the UK would open up another funding avenue to SaaS businesses who are currently made to focus more on equity financing.
Harry Hurst, one of the co-founders of Pipe recently Tweeted the following about Pipe’s incoming UK branch:
Like with all kinds of finance, the best one for each firm depends on the unique circumstances that business is facing.
Subscription-based funding is going to be an interesting route for companies looking to avoid any equity-dilution, want funding fast (well, faster than a 3 – 6 month equity raise), and are happy to pay the associated fees (more on that below).
The clear position on how fees will work in the UK is not yet available (as their lending operations aren’t currently active), however the Pipe lending model works by having the borrowers on their platform sell their subscription revenues (either monthly or quarterly) at a discounted rate of between 2% - 8% of the full value.
This discounted rate allows the Pipe platform and the investors to take a cut and levy fees for the financing.
The main takeaway here is that the fees work by pre-selling your subscription income at a lower price than you sell to your end customer, and you do that to get the benefit of being paid earlier.
Pipe’s impending arrival into the UK signals a new wave of subscription-based financiers looking to British shores. One potential lender is re:cap, a German fintech who just raised a $1.5M funding round and look to model themselves similarly to Pipe’s structure: indicating further that this could be the beginning of a great new funding strategy for SaaS firms looking to grow outside of the traditional equity model.