One of the most critical documents and processes in the growth capital process is the Term Sheet.
On it, you’ll review, negotiate, and eventually accept a number of SaaS funding terms set forth by your venture debt lender. Once finalized, the term sheet essentially gives shape to how you receive your capital, pay it back, and navigate your relationship with the lender. It’s crucial that this document is discussed thoroughly — with your lender, legal team, and any other interested parties — to ensure each detail is accurate and acceptable.
Compared to other financing documentation, a term sheet can be reasonably succinct. However, it’s still important to understand the mechanisms and requirements outlined on it in depth. Here, we’ll explore some of the SaaS funding terms you’ll encounter on this document to help you be fully prepared when you and your team meet with your venture debt lender.
Key SaaS Funding Terms to Understand
- Purpose — A term sheet will typically specify what the venture debt proceeds are to be used for. This might include hiring new staff, implementing new systems, investing in sales and marketing efforts, or other general expenses. If the lender prohibits the use of the capital for a specific reason, this will be stated here. Learn more about how debt financing is typically used for SaaS companies.
- Interest Rate — This is pretty straightforward. A number of factors will influence this, such as your business’ credit profile, the amount you’re looking to receive, the type of loan you’re seeking, and other risk-based points. If you’ve worked with venture debt lenders before, you’ll understand why interest rates are the way they are. But if you’re new to this type of funding, learning more about interest rates and other criteria will be helpful.
- Repayment Term — Also straightforward but very important to understand in full before you finalize your agreement with the lender. The term sheet will typically outline an initial repayment schedule, such as for a standard installment loan. However, there are a number of other types of debt financing that you can take advantage of, such as an interest-only arrangement or step-up financing. Whereas a standard installment loan would require a simple principal and interest payment each month throughout the loan term, repayment would look quite different for the other two options. Learn more about the different types of debt financing here to understand which is right for your business.
- Fees — Understanding any potential fee obligations is critical, as they can dramatically reshape the overall financial picture if you were to repay early. Every lender is different, but some example fees you might encounter include setup or advance fees, in which you are charged a set fee or a portion of the loan amount upfront or when new portions of capital are distributed, as well as early repayment fees, which you might be required to pay if you’re looking to repay too early or before any stipulations have been met.
- Covenants — Apart from the core financial SaaS funding terms you’ll need to understand, it’s also important to understand your performance-based obligations. These are expressed as covenants. Examples include maintaining a certain recurring revenue mark or hitting a certain level of new customers each month. The idea is for the lender to mitigate their risk and provide a foundation of performance that they expect you to meet. If you can’t meet these obligations, it’s called “tripping” the covenant. SaaS lenders will often work with you to help you get back on track, but if things don’t improve, they’ll be able to take any number of remedying actions.
- Warrants — Warrants are an incentive typically offered by a SaaS company (or required by a lender) in order to close the funding deal. A warrant is a financial mechanism in which the SaaS company offers the lender the ability to buy a portion of its stock at a certain price up to a certain point (often at a lower price, too). If agreed upon, the lender will at any time be able to exercise the warrant and obtain an ownership interest in the business. There are a number of risks associated with warrants, and at River SaaS Capital, we don’t require them.
Build a Debt Financing Package That Works for You
While venture debt financing is at its heart a loan, that doesn’t mean it can’t work flexibly for you and your long term goals. Venture debt financing is one of the most flexible avenues for growth capital available — even more than equity financing and other methods of funding. And because it’s designed specifically to help accelerate growth, you receive greater value from it sooner. Learn how companies have used venture debt financing to achieve their goals rapidly.
At River SaaS Capital, our team has been working with SaaS companies for decades — helping them develop strategies that accelerate growth while supporting them closely and consistently along the way. We bring this equity-style partnership approach to every new deal. If you’ve been looking for the flexibility and freedom of venture debt financing but want a team to advise and support you as you put your vision into action, our team is ready to assist. Fill out the form below to connect with our investment team today.
