In recent years, SaaS venture lending has exploded and many lenders are offering loans based on a “multiple payoff” approach.
At its core, the multiple payoff approach is pretty straightforward compared to other loan repayment methods. The loan agreement will stipulate a multiple of the original loan amount that needs to be repaid by the end of the term..
I.e. a multiple of 1.4x will return $1.4m on a $1m loan.
Some lenders will assign different multiples per year to allow for early repayment.
I.e. 1.2x in the first year, 1.4x in the second year, 1.6x in the third year, etc. If you repay the loan anytime during year two, you owe 1.4x the original balance.
We’ve found that many borrowers try to calculate the multiple cost approach as an interest rate. This calculation can be tricky if you aren’t on a fixed repayment schedule, because when you pay off the loan can dramatically impact your cost (as seen above).
Repaying the loan in the middle of a year is especially common when repayments are a percentage of revenue. When this happens, you pay full interest for the year without benefiting from the financing the entire year.
In short, loans using a multiple payoff can result in an increased cost of finance if you pay off mid year or a quicker repayment of the loan if you grow quickly.