As a founder, head of finance, or company leader, you are likely continually building your toolkit to support your growth and maybe the term “revenue based financing” has come up in your searches for capital, or you’ve heard about other businesses leveraging financing for growth using a revenue-based model. So how exactly can revenue-based financing fit into your growth strategy?
We’ve put together some insight to help you find out.
In this article
- Revenue-based financing 101
- 7 ways companies leverage growth using revenue-based financing
- Using MRR to leverage financing for growth
- How leveraging revenue-based financing for growth works
- Payback terms, explained
Read on to learn more about these topics.
Revenue based financing 101
Revenue-based financing is a type of business financing that provides capital upfront against monthly or annual recurring revenue (MRR or ARR). Borrowers can leverage financing to access upfront capital, reduce the cost of managing cash, and invest in growth initiatives.
Essentially, the idea is to borrow against your business’s predictable future performance when you need to access funds in the short-term. Companies use revenue-based financing to borrow against the predictable performance of their businesses.
Revenue-based financing is a relatively new type of financing solution that is tailored to the needs of software as a service (SaaS) and other subscription-based businesses. It is a non-equity based solution, so founders are able to avoid dilution and hold on to their equity. Revenue-based financing is also an alternative to bank loans and venture capital—although it can actually be paired very nicely with VC in many cases and often times may not replace a company’s need to raise VC, especially in the early, non-revenue stream days of the business.
Capchase is a provider of revenue-based financing.. Specifically, our company is a programmatic financing company — it’s a sub-genre of the revenue-based financing category, which is a type of alternative investment financial product. This unique approach blends technology with high-touch underwriting, white-glove customer service, and expert growth advisors.
7 ways companies leverage growth using revenue-based financing
Borrowers can use revenue-based financing at their discretion as fast-access working capital. Financing partners may have restrictions for how to leverage this capital, so it’s important to be mindful of your specific terms and conditions.
Here are some common ways that we see companies leverage revenue-based financing for growth at Capchase:
- Expand headcount
- Invest in marketing
- Accelerate product development
- Invest in establishing systems
- Improve overall capital efficiency
- Reduce the cost of growth
- Gain access to cash, expediently
The idea is to use capital in a way that enables growth.
Leveraging MRR for Revenue Based Financing
Before considering revenue-based financing to fuel your business growth, it’s essential to have a clear understanding of your Monthly Recurring Revenue (MRR) trends and performance. This data serves as a key indicator for financing partners, allowing their underwriting teams to assess the overall health and stability of your business.
MRR is a powerful metric for evaluating a company’s core business performance and is instrumental in shaping both short-term and long-term strategic decisions. There are several reasons why MRR has become a standard for gauging business health:
- Indicates Stability: MRR offers insight into whether a company is on stable financial footing.
- Easy to Interpret: The metric is straightforward, making it accessible to a wide range of stakeholders.
- Guides Marketing Spend: MRR can be used to determine how much the business can afford to invest in marketing efforts.
- Comprehensive View of Performance: MRR encompasses multiple aspects of the business, providing a more holistic picture of its financial health.
- Prepares for Fundraising: Regular tracking of MRR helps companies get ready for key fundraising milestones, such as venture capital rounds.
By using MRR as a reference point, investors, executives, and other stakeholders can align on critical business decisions, such as determining the pace of expansion or allocating marketing budgets.
Because of the integrity and trustworthiness of MRR as a business health metric, financing partners like Capchase are able to provide financing based on a business’s predictive MRR performance.
How leveraging revenue-based financing for growth works
The key benefit to leveraging revenue-based financing for growth is that borrowers can access capital quickly.
If approved for revenue-based financing, eligible borrowers can withdraw funds as needed for working capital. Some borrowers use revenue-based financing as part of a portfolio of other financial products to reduce the cost of managing cash overall.
Every revenue-based financing partner has its own underwriting criteria and compliance requirements, in addition to repayment terms. So you’ll want to conduct your research to determine the right partner for your unique business model.
To get started with revenue-based financing, the first step is to determine whether your business is eligible. This can be done using an application process. For Capchase, as an example, the steps begin with:
- Syncing banking and accounting data.
- Completing a questionnaire about future revenue, along with a due diligence process for lending.
- Matching applicants to opportunities for lending.
From there, applicants go through a credit underwriting process. This entire process can happen within 48 hours for most companies due to the sophisticated and proprietary CapScore™ underwriting algorithm.
Payback terms explained
Every revenue financing company has its own policies and procedures for the terms of repayment. The first step is to determine a repayment schedule as part of a percentage of your MRR. This number will look different for every business.
Capchase uses intelligent software to determine the right threshold for every borrower. The evaluation criteria includes growth goals, anticipated revenue, and past business performance. Because of all the due diligence associated with this discovery, Capchase will never over-extend on capital or offer hard-to-repay terms. Capchase values fairness and transparency in all our customer dealings.
Lenders typically integrate directly with a borrower’s bank account, for a smoother repayment process.
Are you interested in learning more about revenue financing?
It’s important to do your research and make the decision that’s best for your business. Here are 3 immediate steps you can take:
- Sign up to get an offer from Capchase
- Take a look at Capchase’s customer stories
- Browse through Capchase’s growth products
Are you interested in learning how to leverage revenue to get growth financing?
It’s important to do your research and make the decision that’s best for your business. Here are 3 immediate steps you can take if you want to use revenue-based financing to leverage growth in your business:
- Sign up to get an offer from Capchase.
- Take a look at Capchase’s customer stories.
- Browse through Capchase’s growth products.
