Capital is undoubtedly the blood of any software business as enough cash needs to flow for a company to keep functioning. But to thrive, sometimes more money is required than what is currently circulating. And thus, SaaS founders will need the equivalent of a transfusion which is where lenders come into play.
Element Finance Partner John Gallagher, together with B2B SaaS Sales Coach and Host Matt Wolach, talks about how to get into the right debt in the right way. This episode of SaaS-Story in the Making will teach founders why borrowing capital is wise and why they should talk to lenders directly. Watch how to position yourself and get the funding you need!
Podcast: SaaS-Story in the Making
Episode: Episode No. 228, “Ways to Secure Financing as a SaaS Company – with John Gallagher”
Host: Matt Wolach, a B2B SaaS sales coach, Entrepreneur, and Investor
Guest: John Gallagher, Partner at Element Finance
TOP TIPS FROM THIS EPISODE
Use the Correct Debt
There are multiple ways anyone can spend money. Some choices will turn you into a VIP at your bank, while others may require you to file for bankruptcy. The same logic applies when it comes to debt. Hence, it is essential to strategically use borrowed capital, starting with having the correct type of debt.
For example, a company can borrow $2 million for a 24-month plan. Gallagher states that the client will be better off borrowing 9-12 months’ worth of funding instead. He explains that this makes the debt less expensive and prevents money from being dormant. It’s not like the entire capital for a 24-month plan will be used ASAP, right? Besides, further funding will definitely be given after achieving results.
Gallagher and his colleagues at Element Finance go the extra mile by calling each of their borrowers. They ensure that the prospect is suitable for their debt plans and refer them to other options if they’re not. Founders looking to borrow should definitely check them out or try Rocket Option. As suggested by Gallagher himself, users can simply input data, and the platform will list ideal lenders.
Organize Data to Attract Lenders
They say that the first impression lasts. This saying applies to attracting investors as it makes or breaks the deal. Gallagher advises that software founders can put their best foot forward with well-documented financials and metrics.
Tracking all of the cash flow and neatly organizing the information will make it easier to prove that you have an excellent financial process. This move establishes your credibility, which can also strengthen your metrics. Since most investors just look at your files, they’ll only get to know your company through your data, so don’t pull your punches with the paperwork.
Adjust the Pitch to Suit the Financer
The most common mistake founders make when dealing with investors is giving the same exact pitch to everybody. You must tailor your presentation to the type of funder you are speaking to; VC-style forecasts will not make the cut when it comes to lenders.
An example by Gallagher is how they’re not going to write a $30 million check to a company with only $3 million in ARR. While this may work with a VC as they’re high-risk high gain, lenders focus on the most realistic outcome. Customizing your pitch is even more vital as VCs are pulling off the market, and debt will be the most ideal choice.
Borrow to Retain Shareholding and Control
Ever heard of the horror stories of companies that went the VC route? Companies sold for hundreds of millions of dollars only for founders to not get anything at the end? Well, you can avoid that nightmare by going into debt instead.
While borrowing may seem more intimidating than getting funded by a well-known investor, it’s actually much less risky than VC deals. Not to belittleVCs, but they are designed to only have a few winners from the companies they’ve dealt with. They do crazy deals as they need big massive exits. Meanwhile, you don’t need to make your entire company collateral when dealing with lenders.
Get on a Call with Investors
Contrary to expectations, many investors are willing to hop on a call with you if you ask. This will be helpful for those who are in the early stages as they would usually give a good lay of the land. They will also be straightforward in telling you if you are the right fit or not.
Gallagher pointed out that people tend to be more helpful on a phone call. This is most likely due to the human interaction that’s absent when a lender merely looks at numbers behind a screen. He elaborates that humans are inherently good and want to help each other out, which is something that founders can utilize.
Finances Differ Per Stage
What you would need when you’re starting out would be different when you’re finally hitting $10 million in ARR. Eventually, you would need to raise money to grow your company further; sometimes, debt is your best option.
Borrowing capital will allow you to reach the full potential revenue that you otherwise would not have gotten with only bootstrapped funding. Of course, there are other options, but, whatever you choose, ensure that it maximizes your potential gains.
Scaling Needs Investment
Following the previous point, there comes a time when the business has become big enough that the founder needs to focus on running it. This means that the company would need to invest in hiring employees to manage tasks that the founder used to oversee, such as sales and marketing. But like any other investment, time is required for results to manifest. The seed money from a lender will take care of the maturing period ensuring your company safely reaches the period of ROI.
[2:50] “Every company at different stages needs different types of finance. And you know, when you start off your company– it’s good; You’re gonna start it off with your savings, maybe some friends and family are going to invest in you, some angels then maybe some seed VC. But as you progress, your need for finance changes.”
[6:53] “In the lending world, there’s a lot of options at the moment that are plug and play; plug into a system, download your data. They rarely speak to you and they send money. And that’s– that’s all well and good. But the way we go about it is probably more the enterprise sales type where we’re gonna get on the phone with you, we’re going to talk to you, see how you understand your business, and try and figure out what’s the best option for you. Maybe it is us. Maybe it isn’t. But making sure that the companies we lend to are using us in the right way and for the right things.”
[8:38] “I just really love getting on on phone calls with our potential customers; figuring out their needs, figuring out how we might be able to help them or might not, and hearing about how they built their business and how they’ve maybe overcome the quarter that was really difficult or when they have to pivot the business or– or something like that. So that’s what really– what I’m really passionate about; hearing those stories and working with those people and being part of their next– the next journey forward.”
[20:31] “I think a lot of– a lot of the people in both VC and in the debt space, are very open to, you know, setting up a quick call. And it might be– it might be an associate that you’re talking to, but they’ll give you a good lay of the land, whether it’s a quick fit for them or not… It’s amazing how helpful people are when you get them on a phone, you know. People are inherently good and want to help each other out. So I’ve always found that very very useful.”
[5:31] “I know a lot of founders, and I work with a lot of them, and they come to me for sales help, growth help, but a lot of them are very– and this is me too– very clueless about what’s going on in finance. And they just think, ‘Okay, if I need money, I just go out and get some big investor and I give them a share of the company. And that’s it.’ But it sounds like there’s a lot of other options.”
[21:13] “I think it’s amazing how, especially in this community in the SAS world, I think everybody’s kind of very open to helping.”
To learn more about John Gallagher and Element Finance, visit: https://www.elementfinance.com/
You can also find John Gallagher on LinkedIn at: https://www.linkedin.com/in/john-gallagher-7a164113a
For more about how host Matt Wolach helps software companies achieve maximum growth, visit https://mattwolach.com/