Software as a Service (SaaS) is a popular business model where you create software that people can ‘rent’ for a monthly fee. Essentially, users are on a subscription to use your software. With this, you earn recurring monthly revenue through the subscription fees.
If you want to run a SaaS business, you will need startup capital just like any other business. One way to get those funds is by getting a loan from a money lender.
The question is, should you? Here are four guidelines.
Yes, because you retain 100% ownership of the company
If you take out a loan for your SaaS startup, you get to keep 100% ownership. You are not obliged to hand over a certain percentage of your company to the lender in exchange for the loan. Your only responsibility is to pay back the money you borrowed.
When your startup becomes profitable, you get to keep all of the revenue. Only the monthly repayments would go to your lender. But once the loan has been paid off, all of the company’s income is yours.
Yes, because loans are easier to get
Compared to other forms of funding like grants, crowdfunding, angel investors, and venture capital (VC), taking out a loan is a much easier process. As long as your credit score is good and you have the capacity to pay back the loan, you can get approved. Other forms of funding have more legalities and prerequisites to fulfill before you can get the money your startup needs to move forward.
No, because other funding options exist
As said above, a range of funding options other than loans are available. Angel investors, for one, will not oblige you to pay them back no matter what happens to your startup. They do ask for an equity stake, though.
If your startup fails, angel investors bear the risk of losing their entire investment at no cost to you. But if your startup takes off, they can recoup their investment through the portion of shares you gave to them.
Crowdfunding is another popular method, with platforms like Kickstarter, Indiegogo, and others. In this funding model, you ask people to pledge their money to your startup before you officially launch it. In exchange, you would reward your investors with special perks, early access to your product or service, and discounts for early purchases, among others.
No, because there is a risk of defaulting
You can never be absolutely sure that your startup will take off. If you experience financial difficulty in the first few months, and you have monthly loan payments, you may become delinquent in your repayment. Eventually, you may resort to defaulting on your loan.
If your startup does not become profitable and you default on your loan, you still have the financial obligation to pay the loan back. With that, you will be more hard-pressed to repay the loan.
Conclusion
Taking a loan for your SaaS startup has pros and cons. With the reasons outlined above, you should be able to make a more informed decision for the benefit of your startup. If you must take out a loan, find a lender with favorable terms.
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