Financing structures for non-SBA eligible cash flow businesses?

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August 18, 2020

by a searcher from Massachusetts Institute of Technology - MIT Sloan School of Management in Los Angeles, CA, USA

Interested in understanding financing structures for cashflow SaaS businesses that are not SBA eligible (partner/partial buyout). Traditional financing terms I have heard would be a cap of 3X EBITDA at 6-14%, which seems very expensive. I am reviewing a B2B SaaS business with EBITDA of $1.5MM, 20% margin, proposed price 4x to 8x, 95% customer retention, recurring revenue model, and growing market. Interested in financing the transaction through combination of debt and equity.

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Reply by a searcher
from University of Pennsylvania in Tiburon, CA, USA
You could look into revenue-based financing (RBF) models- likely focused on capital used for growth/operations of a currently owned business, rather than capital for acquisitions- but may worth looking into. This comes to mind since years ago, I was advising SaaS startups with healthy revenues and a path to growth and I pointed them towards RBF, which offered them a way to use SaaS revenue streams to grow, without parting with equity in the earlier stages of their growth trajectory.

I did a deep dive and saw Lighter Capital as an early leader- since then, many new companies/models, including Pipe, have entered the scene. This may not meet their requirements to apply capital to an acquisition, but could be a good tool to keep in mind for the operating phase.
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Reply by a searcher
from University of Pennsylvania in Chicago, IL, USA
From my experience, non-SBA debt that is cash flow oriented typically requires “sponsorship” meaning an investor/individual in the cap table with assets far exceeding the loan value. Some lenders will only look at institutional backed acquisitions (PE) for true cash flow loans. Otherwise, the back of the envelope math is senior debt = ~value of assets, not to exceed 2-3x EBITDA. Terms tend to be 7yr amortization with 5 year term. Collateral shortfall might be acceptable to lender provided it can be made up via cash flow recapture in the first###-###-#### months. Interest rates are low ~4.5%. This type of debt will eat up almost all the earnings but it is very cheap.
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