SaaS Revenues Are Not the Same as ABL Cash Flows

Lending against SaaS revenues is starting to get a lot of traction, attention and excitement.

It’s probably a good idea. SaaS companies are easier to underwrite than many other types of businesses because they lock themselves into monthly contracts with customers, and then over a period of time you can decide what % of customers at any given moment are likely to “churn.”

“Churn” feels suspiciously similar to a default rate. And the SaaS revenues, with their monthly regulatory feel similar to interest payments. Over time, as these lenders become more popular, the word Churn will get defined by expensive lawyers in all kinds of ways. Is a customer who’s on “Pause” churned? Impaired? Are they able to come back into the collateral pool if they resume? What if they lower their subscription? Increase their subscription?

The point I’m trying to make is… it’ll happen. SaaS lending will be a thing.

But the point most investors are missing, is that the biggest difference between traditional Asset-Backed Lending (ABL) is that there is significant reliance on the servicer.

If I lend against a bunch of homes — and the person who is collecting the payments on those homes goes away, I can find a backup. There isn’t just one company on the planet that goes around collecting peoples mortgage payments. It’s called a Backup Servicer. It what makes me primarily secured by the assets I’m lending against, and not subject to the corporate credibility of the company collecting the checks for me.

But in SaaS lending, you ARE taking corporate credit risk. It might be better corporate credit risk than normal... but if the SaaS company goes away, who else is going to maintain the software?

If you lend against the cashflows of Docusign, I guess you could have the Hellosign take over the contracts if you needed to? Maybe? But there would be a ton of onboarding, security DD, it would be sticky. And that’s one of the easier transfers to imagine.

So in short, SaaS lending should not be compared to ABL. It should be compared to corporate lending. And just like the equity of SaaS companies trades at higher multiples for its predictability and high margins, its debt should be offered at lower rates.

But it should never be forgotten that, in its current form, it’s a corporate loan.

[5'9", ~170 lbs, male, New York, NY]. I blog about investing. And usually about things I’ve learned the hard way. Opinions are my own, not CoVenture’s

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