Ever since we started Element, our goal has been to provide the most straight forward, no B.S. financing solutions to SaaS companies.
Beyond not taking warrants or personal guarantees, we look to be a flexible finance partner for our clients.
We want to make the finance process as painless as possible while reducing the cost of capital for our borrowers. One way we extend this flexibility is by allowing loans to be drawn in multiple tranches over the course of the term. This helps reduce the total cost of the loan, while boosting the borrower’s cash flow.
Don’t Leave Cash Just Sitting Around
The truth is, it takes time to spend six months’ worth of revenue. Most companies can’t efficiently use the entirety of a loan that size within 6-12 months. Additionally, it is difficult to forecast how much cash you will actually need 12 months from now. Some companies end up borrowing too much or too little.
Instead of paying for money to sit in the bank account, multiple tranches saves you the interest on unused funds. Tranches also allow you to determine how much cash is needed closer to the time it will be used.
Multiple Tranche Example:
In the example above, we’ve created a hypothetical company taking a loan under two different funding scenarios. It compares a single call vs taking the same loan with multiple tranches.
- Cost of Capital: The three tranche solution would reduce the amount spent on servicing the loan by over 950k. That’s a 17% lower cost of finance over the first three years. Of course, the company would have less capital over the first two or three years. However, unless that additional money can be spent efficiently in that time period, it just ends up costing the company more in interest payments.
- Quick Capital: By agreeing to tranches up front, a company is able to take on new debt without going through another full diligence process. Additionally, if the company finds itself in need of more funding than initially agreed upon, the lender has already done extensive diligence, and will likely be able to fund much more quickly.
Offering this flexible funding structure has saved our clients a lot of money. Unless a company has a specific use for the funds immediately, we typically recommend taking a loan in tranches.