Cloud Accounting Startup FreeAgent Raises $5M In Debt Financing

TECHCRUNCH: FreeAgent, the cloud-based accounting software startup that targets freelancers and so-called “micro-businesses”, for which it claims to be the leader in the U.K., has raised a further $5 million in funding — money it plans to use to increase the rate of customer acquisition (read: marketing).

This time around, however, the additional capital comes in the form of debt financing from SaaS Capital, which was set up in 2012 specifically to provide “debt-based growth capital” to SaaS companies.

The idea being that these type of revenue-positive companies can leverage financing based on future and reoccurring revenues afforded by employing a Software-as-a-Servce model and via a mechanism that means founders don’t need to be diluted any further.

“We have historically raised equity and also used some venture debt, but we found the SaaS Capital solution to be a great way to finance our growth compared to those options,” notes FreeAgent co-founder and CEO Ed Molyneux in a statement.

The Scotland-based company also says that by using SaaS Capital to finance growth, it’s able to “draw more capital over a longer duration than other lenders, while avoiding ownership dilution.”

That’s perhaps significant when you consider that FreeAgent is already into its 8th year and is thought to have given away a significant amount of equity. It’s my understanding that the startup’s founders own about a third of the company.

“It’s hard for startups to get access to debt at this level of facility, so for companies who can demonstrate predictable and scalable customer acquisition it’s a great way to grow faster, it’s a great validation that we’ve built a scalable business model,” Molyneux tells TechCrunch in an email.

 “This will help us invest more heavily in customer acquisition in both direct and the accountancy practice channel, where we’ve gathered real momentum in the last year, with large accountancy practices like JSA who have more than 2,000 of their clients on FreeAgent. We’re detecting a real shift in the rate at which accountants are embracing the cloud,” he adds.

Today’s FreeAgent news also comes at a time when the cloud-based accounting software market in the U.K. remains ripe for further consolidation. In late 2013, Iris acquired KashFlow for a rumoured £20 million, leaving a plethora of accounting SaaS startups on the table.

Along with FreeAgent, these include Clearbooks and Crunch, the latter also primarily targeting freelancers and micro-businesses, albeit with a model that also includes an accountant.

Meanwhile, Sage might well be finally getting its SaaS act together under new CEO Stephen Kelly, and could still offer an exit to any number of U.K. cloud-based accounting companies.

Other potential acquirers include Netherland-based Exact, who were reportedly in talks with KashFlow at some point, along with a number of legacy payroll providers who might still want to move into the online accounting software space.

Regards the latter, it’s my understanding that in late November 2012 PayChex met with a number of U.K. SaaS accounting startups, including both FreeAgent and KashFlow, before eventually making a strategic investment in Canada-based Kashoo.