Venture debt is still a relatively new form of financing for SaaS businesses, and there are lots of elements of its structure that aren’t fully understood yet. A big part of this is the difference between amortized vs. non-amortized loans.
If these terms are new to you, you’re not alone. However, they are familiar loan formats that you’ll probably recognize from other areas of your finances, like your car and mortgage repayments.
Read on to find out what amortized and non-amortized loans are, what they mean in the context of venture debt loans, and how each one can impact your company differently.
In simple terms, an amortized loan is a loan with scheduled, monthly payments that chip away at the principal amount as well as the interest accrued.
Loan repayments are spread out into multiple fixed payments over the duration of the loan, which can range in length. They work by allowing the borrower to pay off the interest expense first before splitting up the remainder of the payment for the principal amount.
Interest is calculated based on the most recent ending balance of the loans, so it can (and does) fluctuate each month.
The balance of the amortized loan is multiplied by the interest for the current period. The interest is then subtracted from the total monthly payment for the principal amount. You can use this amortization calculator to get a ballpark figure for potential repayments.
If you borrowed $100,000 over a 10 year period at a 5% interest rate, your monthly repayments would be $1,060.66:
So where does an amortized loan fit in the context of venture debt?
Essentially, it means a SaaS company can secure a loan that they’ll pay back in regular monthly instalments.
Amortized loans are one of the simplest loan repayment methods and are therefore some of the most common venture debt options in the SaaS world.
They work because they:
Like with anything, there can be some downsides to amortized loans, mostly because the interest rate can fluctuate month to month.
Some cons include:
At their most basic level, non-amortized loans are paid back at the end of the loan period or at least mostly at the end of the loan.
If you’re looking to borrow $10,000, an amortized loan will see you paying back $2,500 every quarter at a 5% interest rate, whereas a non-amortized loan will only require you to pay back the $10,000 at the end of the year (or loan period) at a 5% interest rate.
There are several different types of non-amortized loans, including interest-only and deferred interest loans.
These are the most common non-amortized loan types in the venture debt world:
Perhaps the most obvious advantage to non-amortized loans is that you don’t have to pay anything back right away. This is particularly beneficial for SaaS brands that are still building up their user base.
Here are some other pros of non-amortized loans:
SaaS brands might find themselves in trouble if they acquire a non-amortized loan that they’re unable to pay back at the end. Along with this, there are a few other disadvantages to bear in mind with non-amortized loans:
The right loan for one SaaS company might differ from another. It completely depends on your current revenue status and your long-term plans for growing your user base and MRR.
For example, if you have a concrete business plan to generate a certain amount by the end of the year, a non-amortized loan might be a good fit because you can pay everything back at the end. On the flip side, if you’d rather play it safe and pay back portions of the loan each month to stay on top of it and avoid a large lump sum at the end, an amortized loan might be a better fit.
However, it’s worth bearing in mind that some loans are easier to get than others. SaaS brands that are just starting out might struggle to secure an amortized loan if they don’t fit the criteria, which means they’ll only be offered non-amortized loans.
Flow Capital offers venture debt options in both an amortized term loan and a non-amortized bullet loan. The former covers a 2-4 year term, while the latter covers a 2-5 year term.
Finding the right financing options for your SaaS brand is crucial as it ensures you have the resources available to grow. Take the time to research your options and figure out which one is the best fit for you and your business.
