Useful Suggestion for Working With Your Lender
When Things Aren’t Great

A Guest Post by:

Todd Gardner

SaaS Advisors Ltd.

As I wrote early in 2021 (now known as the “good old days”), there are only three ways to repay debt:

1. Repay with cash from operations
2. Raise equity or more debt
3. Sell the company

I also stated that it takes a “well-functioning” capital market to pull off the latter two scenarios. And here in 2023, neither the equity, debt, nor M&A markets are functioning well. So with options two and three off the table for all but the top-performing SaaS companies, repaying debt through operations is the default position.

For many SaaS businesses, pivoting to cash-positive plus amortizing debt is a big task and likely one that’s being made more difficult with the weak economy slowing down new sales and pressuring renewals.

Whether your SaaS company was overleveraged, to begin with, or was conservatively funded, de-levering is a difficult task. However, here are some suggestions to help navigate the process:

Increase Optionality:

CEOs and CFOs should pursue as many options as possible in parallel. These include debt restructuring (discussed below), internal equity, external equity, new lenders, subordinated debt, customer advances, and cost cuts. Betting on a single path to yield the required cash is risky, and pursuing each option serially will take too long.

Use All the Levers:

Similar to the point above, success is more likely to be achieved by working on the problem from three fronts:

• cost reduction
• debt restructuring
• incremental equity

Working from all three angles makes the cost cuts lower, the equity raise smaller, and the debt restructuring less severe.

Work with your lender:

When I worked through troubled loans at SaaS Capital, the following approach by borrowers was always the most productive.

• Have a plan when you talk to your lender. For example, don’t come to the lender with “I can’t make my payment.” That creates an adversarial set-up and, more likely than not, hardens their position.
• Show the lender what you’re doing to fix the problem. Outline the cost cuts you have made and the additional capital you plan to bring into the business. I always reacted favorably when the management team and the investors were doing their part.
• Don’t make the cash projections too rosy. That will create an even greater cash crunch and diminish your credibility.
• Don’t expect too much. Some lenders won’t work with you in the hopes that you will refinance with a different lender.
• Play your “ace” carefully. As a borrower with virtually zero liquidation value, lenders are inclined to want to work with you. If the investors and team walk away, the lender will get very little of their loan back, so this is your “ace.” But you need to be careful. In this scenario, the investors and team get zero as well. Threatening to walk away from a $10 million ARR SaaS company with a $2 million loan will look like a bluff and erode your credibility.

Restructuring Specifics:

I’m not an expert here, but in my experience, it’s best to think about this as a give-and-take.

The company has a few things it can give:

• A burn reduction plan with restructured covenants
• Capital investment
• A plan to sell the company with specific milestones
• Agree to pay a higher interest rate

The lender has more levers:

• Payment reductions/suspensions
• Waiver of covenants
• Agreement not to liquidate for some time
• Complete restructuring

In the case where the company has access to some equity capital, the typical next step is for that capital to come into the business and for the lender to agree not to liquidate the company. (The one time the company does have liquidation value is when it has cash.)

Under this scenario, the borrower should try to preserve as much of this new capital as possible to fix the business (transition to breakeven) and not have the lender scoop it up.

If there is no outside capital available, the management team’s responsibility is to start generating some cash. The lender’s job is to make the debt service manageable while they try to do that. So in this scenario, it’s reasonable to ask for principal and interest payments relief.

Keep in mind, if it’s clear there is no equity value in the business, the management team has a responsibility to behave in the best interest of the lenders, as they are now the de facto shareholders.