The Smarter Startup

Critical Metrics for SaaS Startups Pursuing a Loan

Important SaaS KPIs like ARR and LTV:CAC often won’t get you far with debt-based lenders.

In today’s challenging VC funding environment, many startups are evaluating alternative ways to secure necessary working capital. A few SaaS startups I advise at Burkland have been pursuing lines of credit from venture lenders (i.e., banks).

Through the process of helping my clients meet with lenders and go through the steps to secure their loans, I’ve observed a big difference between the metrics lenders use to evaluate a SaaS startup and those used by VCs and other equity-based investors.

SaaS founders and their management teams usually focus on a core set of about 10-12 KPIs such as ARR, CAC:LTV, and Magic Number. VCs are also focused on these numbers, as they typically give the best picture of unit economics, scalability, and future revenue/profit potential.

This isn’t the case with banks and other debt-based lenders. I’ve found that even banks that “talk the talk” with SaaS KPIs often don’t really understand them, or at least don’t rely on them when making underwriting decisions.

Lenders Want to Know Your Recognized Revenue and Cash Flow

Instead, banks and other venture lenders care about cash and your monthly Recognized Revenue. Remember, lenders aren’t concerned about the multiples of your value a few years in the future but rather with your ability to repay your loan principal and interest in full and on time.

No problem, I’ll just divide my ARR by twelve, right?

Unfortunately, calculating your actual Recognized Revenue for a month isn’t as simple as dividing your ARR by twelve. While this math is usually just fine for startup founders, CFOs, and VC investors, it isn’t precise enough for most lenders. Factors like subscription cycles, contract start dates, and credits can create a difference between ARR divided by 12 and monthly Recognized Revenue of as much as 10%-20%.

SaaS startups approaching banks or other venture lenders for a line of credit need to have a good handle on their Recognized Revenue and an accurate, standard way to report on it.

The model shows we have enough cash for another 12 months!

While lenders will look at your long-term cash forecast to ensure you have a plan that keeps you solvent past the term of their proposed loan, they will also be looking to ensure that you have a solid handle on managing your operating expenses and cash collections.

Having an accurate short-term cash forecast is critical in order to provide potential lenders with near-term projections that you’re able to hit. I usually work with my clients to build a cash forecast based on actual customer and vendor invoices which gives us a clear picture of cash inflows and outflows over the next 6-8 weeks.

I advise SaaS startups pursuing loans to consider these actions:

  • Work with your CFO to update your primary financial model to account for Revenue Recognition. See Burkland’s Deferred Revenue Schedule for an example template.
  • Create a separate, more detailed revenue forecast. This could be generated with the help of a subscription management platform like SaaSOptics or Recurly.
  • Maintain a short-term cash forecast organized by customer and vendor that enables you to manage your short-term working capital.

If you can’t close an equity round right now or are choosing to wait for a better valuation in the future, a line of credit can provide valuable working capital. Before you approach lenders, it’s critical to know your Recognized Revenue and have a strong handle on your cash flow. Burkland’s CFOs are here to help; contact us to request more information.