There are many ways to fund a startup, from term loans to revenue-based financing to venture capital. Each type of funding comes with its own rules and tradeoffs; and, truth be told, what’s good for one business may not be right for another.
A business line of credit is one option that can be an excellent choice of working capital for a growing venture. Many in the SaaS startup community are so focused on angel investing and venture funding that they aren’t as familiar with these more traditional banking products. The reality is a business line of credit can be an excellent option for SaaS companies that are pursuing steady, stable growth and need non-dilutive capital at reasonable rates.
Here are the basics about this kind of lending — which Lighter Capital is now offering, called the Lighter Line of Credit — see if it might be a match for your SaaS company.
What is a business line of credit?
A line of credit is effectively a startup financing solution that can be readily tapped at the borrowers’ discretion. It it a flexible and revolving low-cost alternative to equity or venture debt, providing startups with monthly working capital as a cushion to pay for regular business operations. With a line of credit, startups can save money with lower interest expenses and advance or draw on the line when they need the money.
The Lighter Line of Credit provides businesses with access up to $1 million in working capital on-demand and peace of mind knowing you can make essential payments. It is a low-cost alternative to traditional debt in which startups can keep a capital cushion to draw from and pay only when you start drawing funds. There’s no dilution to ownership, and you only pay for the capital once you start drawing on it — and only while it’s drawn.
How a business line of credit works
A business line of credit works kind of like a credit card: You get approval to borrow up to a particular limit, and then you only pay interest on the portion of that approved funding you actually borrow. There are two types of business lines of credit: secured lines of credit, and unsecured lines of credit. Secured lines of credit typically offer higher limits and better rates.
However, a line of credit is different than a credit card in several ways that make it a more useful mainstay for doing business. Lines of credits usually come with higher limits and lower rates than credit cards. And they allow you to access the funding in cash, so you can make payments that require liquidity, such as lease payments, payroll, and payments to particular vendors.
With a line of credit, you are able to keep borrowing again and again, then repaying again and again, as long as you don’t exceed your credit limit in total borrowing at any one time. As such, a business line of credit can be good for companies that have occasional needs, variable costs, or “bumpy” revenue.
What is the basic structure of the Lighter Line of Credit?
A line of credit helps finance working capital needs. This generally means financing accounts receivable (AR). The basic structure of the Lighter Line of Credit is as follows:
Revolving: Businesses can draw on the line (meaning get capital from Lighter) and pay down the line (giving Lighter back capital) multiple times during the life of the line of credit.
Maturity: Lines of credit will mature in one year. They may be extended for additional years – we expect many will be.
Draws: Businesses can draw twice per month. In the future, we expect to offer companies the ability to draw more times per month.
Draw Notice: Businesses will need to provide Lighter Capital a minimum 3 days notice to make a draw on the line.
Minimum Monthly Payment: Businesses will be required to make a payment each month they have an outstanding balance. The minimum payment amount will be for all accrued interest from the prior month plus 5% of the outstanding principal. This is similar to a credit card — each month you must make a minimum payment of interest and some principal. And just like a credit card, customers may re-draw principal that they have repaid.
Pricing & Rates: The total amount of combined interest and fee income to Lighter will be the same for Lines of Credit as it is for Revenue-Based Loans and Term Loans, currently 15-30%.
A. Facility Fee: On the first payment date, we will charge a Facility Fee of 1% of the committed amount of the line. If the line is renewed for another year at maturity, we will charge a new Facility Fee of the same amount.
Example: If in January we originate a $500,000 line of credit to Company A, we will collect a $5,000 fee at the February payment date. The company can make this payment in cash or it can be added to the balance of the line of credit.
B. Interest Rate: The interest rate on the outstanding balance will generally be 1% below the total rate. This is because of the 1% facility fee.
Example: If a company has a minimum risk rating of 16%, then the lowest line of credit pricing we can offer is a 1% Facility Fee and 15% interest on the outstanding balance.
C. Floating Interest Rate: Interest rates will be floating, (based on the Prime Rate) with a floor (minimum interest rate). This is the same as we have set for most Term Loans.
The benefits of a Lighter Line of Credit
To understand the benefits of the Lighter Line of Credit, we must first realize some of the challenges many startups will no doubt encounter. There are two common, but problematic, ways in which startups manage their working capital needs.
Keep a capital “cushion.” Many startups keep funds in their bank account to manage the normal ups and downs of their cash flow cycle. This can be very expensive, since those funds often come from an equity raise or long-term venture debt. The problem many startups face is that their working capital needs increase as their company grows, requiring a progressively larger cushion, which is unsustainable in the long-run.
Sell or “factor” accounts receivable. Many startups sell their receivables to banks or other financial service providers (known as “factoring companies” or “factors”) to off-set their working capital needs. This is an expensive option, often costing an additional 1.5% to 2% per month plus fees and be perceived as a red flag to a startup’s customers. Factors require a startup’s customers to send payments directly to the factor’s bank account and, in many cases, factors will contact customers directly to verify each underlying sale. This process can raise customer concerns that they company is low on cash.
In contrast, the Lighter Line of Credit can scale with a company’s growth and enables companies to draw capital without interfering with customer relationships and payments.
How do I qualify for a business line of credit?
In general, most lenders will require you to have been in business for several years — and at the very least six months — and to have built up some steady revenue streams during that time, usually at least $25,000 in annual income. You may need to have a good credit score to quality. And to get approved for a high credit limit, you will likely have to provide collateral to secure the lending, such as property of some kind.
The application process for traditional banks is more time-consuming, usually involving an in-person visit, than that of online lenders, which allow you to apply online. Whether you apply to a bank or an alternative lender, you’ll need to provide basic information about your business — tax returns, bank account info, and financial documentation like a profit-and-loss statement and a balance sheet.
To qualify for a Lighter Line of Credit, at this time, Lighter Capital is providing lines of credit based on accounts receivable levels. The minimum qualifications we look for include:
Tech companies (Software, SaaS, tech services, etc.) with Accounts Receivables
Monthly recurring revenue (MRR) is an average minimum of $15,000
Based in the U.S. or a subsidiary in the U.S.
Where can I get a line of credit?
With a little legwork, a SaaS company in need of flexible funding will be able to find a lender to provide a line of credit. Banks and credit unions usually offer lines of credit, but these traditional institutions aren’t always the right match for SaaS companies. SaaS businesses are often rich in intellectual property, but low in physical property, which can be a roadblock to getting approved for a high credit limit from a bank that demands the usual forms of collateral.
SaaS companies can more easily qualify for unsecured lines of credit with lower limits, particularly from online lenders that are interested in innovation and expanding the availability of capital to nontraditional applicants. Yet borrowing from an online lender will often come with higher interest rates than working with a traditional bank.
A few banks and institutions work to accommodate SaaS business or even lend exclusively to them. Lighter Capital partner Silicon Valley Bank works with tech companies in growth mode. And at Lighter Capital, we now offer lines of credit to SaaS companies, along with term loans and revenue-based financing. Unlike tech banks, raising venture capital is not required to receive a Lighter Line of Credit. Startups can receive a revolving line of credit up to $1 million in as little as 10 business hours and draw from it whenever the working capital is needed.
Seeking a business line of credit? Learn more about your financing options
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