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5 key differences between Customer Financing & Revenue Based Financing for SaaS companies.




This is one of the most common questions that I get from SaaS CEOs, CFOs, CROs, and Investors. 


Both are financing solutions.

Both are used by software companies.

Both deliver value in their specific use cases. 


BUT, there are a couple of really big differences:



1️⃣ THE UNDERWRITING 


Customer Financing: Underwriting is done on the customer or the company who is signing the software contract. 


Revenue Based Financing: Underwriting is done on the vendor or the company who is providing the software.


Customer Financing = Customer debt position


Revenue Based Financing = Vendor debt position 


2️⃣ THE LENDING STRUCTURE


Customer Financing: Contract-by-contract basis and the lender is lending on the total contract value (TCV) of each contract. So, if it’s a 3-year subscription with a TCV of $300K, that is the amount being funded upfront to the software vendor. 


Revenue Based Financing: The lender provides a loan to the vendor based on their total annual recurring revenue (ARR). So, anywhere between 10% - 60% of that company's ARR is their loan amount.


3️⃣ WHO IS REPAYING IT


Customer Financing: The lender collects monthly, quarterly, or annual payments directly from the customer.


Revenue Based Financing: The lender collects payments directly from the vendor.


4️⃣ WHO HOLDS THE REPAYMENT RISK


Customer Financing: The lender assumes the collections risk of the customer’s payments. So, if that customer stops making payments, it’s non-recourse to the vendor.


Revenue Based Financing: The vendor is responsible for making their loan payments regardless of whether their customers pay or not.

5️⃣ THE RATES


Of course, rates are going to fluctuate based on economic conditions and loan structures. But, as of today, 


Customer Financing: 12% - 18% flat discount rate based on the contract length. So, on a 3-year subscription contract worth $300K, lenders could fund 88%, or $264K directly to the vendor and collect 0% interest payments directly from their customer. 


Revenue Based Financing: 20% to 27% APR including interest, discount, and fees based on term length. Some lenders will also include warrants. 

To reiterate, both financing solutions deliver value in their specific use cases. In fact, software vendors can actually use both together. I call this “stacking” because one occupies a debt position, and the other does not. This can be an extremely powerful tool for expansion capital.

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