Will financial institutions ever embrace the SaaS marketplace?

Even though businesses throughout the United States have embraced the SaaS model, most finance companies continue to present a cold shoulder when asked to provide competitive financing alternatives for companies who offer their application through this environment. Developers and banks seem to be at polar opposites when you examine their individual needs.

Developers The developer needs help to cash-flow their business while they are building their client base and reach a critical mass. Their investment in sales, marketing and development continues to drain their existing capital resources while their revenues grow, but at a much slower rate. Their financial ratios seldom meet any traditional financing guidelines; their assets are generally cash or "soft" assets, highly leveraged and many times un-profitable. Unless they can make their customer's contract liquid they could run out of money before they hit critical mass.

Bankers Bankers evaluate the credit worthiness of an applicant based off standard financial ratios, available collateral and strength of the business. They avoid loans where they're over exposed or heavy in "soft" costs unless it can be collateralized with other assets owned by the business or personal assets of the owner. With the current issues in the housing and subprime lending markets, bankers are further tightening their credit window making it even more difficult for many businesses to obtain the necessary financing to grow their business.

With these two polar opposites, will financial institutions ever embrace the SaaS model? The answer is yes, but it will take time and a financial institution that understands and accepts "soft" costs.

Twenty years ago, financing software was considered outrageous for many bankers. There was no asset to help reduce bad debt, you had a license agreement that couldn't be resold and it was software! For many bankers, this feeling still prevails but as time went by others started to understand this "niche" market and more competitive products were introduced. Today, businesses all over the United States can finance software, training, services and maintenance agreements in a matter of minutes. Larger software developers have partnered with banks or leasing companies to offer programs that are competitively priced and very flexible. Companies no longer have to worry about collateralizing these purchases with other assets or paying excessive rates. This too will occur in the SaaS marketplace however the speed in which these new products will be introduced will be much faster. Why?

1. Because the financial markets, experience and tools available are much better than they were twenty years ago.
2. The growth in the SaaS marketplace is enormous and they see the opportunity. 
3. They will leverage their experience in software financing and introduce programs that will allow them to manage the risks. 

Managing the risks

What is the worst case scenario and how do I minimize my risk? That is how any executive in the financial world will evaluate potential relationships in the SaaS market. If everything is going down the drain, how can I minimize my losses? What are the risks in the SaaS model? Depending on the application, the biggest risk is not the developer going out of business but the end-user not having access to the application if the developer is gone. If the end-user can still access and use the software the recurring revenue may still be there. If not, all revenue ends and/or lawsuits begin. Financial institutions will look closely at the relationship between the revenue stream and their ability to access the application. Many will seek to minimize their risk by establishing relationships with stronger application providers like OpSource and plan for the worst case scenario.

Emerging products

There are a number of companies that have introduced programs to help the developer liquefy their recurring revenue stream. Some require the developer to account for this as debt; others are variations of receivable factoring while others require equity. Falcon has introduced a program that allows the developer to present value the revenue stream without any additional liability to the developer and eliminating their administrative costs of billing and collecting the receivables. The developer would determine the monthly service cost for their product and Falcon would advance eleven of the twelve annual payments. If the contract is longer than twelve months, Falcon would continue to fund this revenue stream each annual period. The developer receives the necessary capital to build their business and the customer receives the advantages of the SaaS model and those of the application itself.

Others programs are on the way. At first, some may be more restrictive, which should be expected, but over the next twenty-four months more will be introduced. Finance companies will weigh the risks and the rewards and they will see there can be great rewards in the SaaS world. 

About Falcon Leasing

Falcon Leasing, an affiliate of Falcon National Bank specializes in financing software and other IT related products to businesses throughout the United States. Falcon works with Independent Software Vendors (ISV's) and their resellers to develop unique financing plans to shorten their sales cycle and increase their sales. Partnered with OpSource, Falcon offers developers another option to help them enter the SaaS marketplace.