As a founder, head of finance, or company leader, you are likely continually building up your toolkit to support your growth — and maybe the term “revenue financing” has come up in your searches for capital. So how exactly can revenue-based financing fit into your growth strategy?
We’ve put together some insight to help you navigate this question.
In this article
- Revenue financing 101
- Ways companies use revenue financing
- The importance of MRR
- How revenue financing works
- Payback terms, explained
Read on to learn more about these topics.
Revenue financing 101
Revenue financing is a type of business financing that provides capital upfront against monthly or annual recurring revenue (MRR or ARR). Borrowers can use revenue 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 financing to borrow against the predictable performance of their businesses.
Revenue 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 financing is also an alternative to bank loans and VC (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 early, non-revenue stream days of the business).
Capchase is a type of revenue financing company. Specifically, our company is a programmatic financing company — it’s a sub-genre of the revenue financing category, which is a type of alternative investment financial product. Capchase’s unique approach is to blend technology with high-touch underwriting, white-glove customer service, and expert growth advisors.
Ways companies use revenue 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 using revenue 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.
The importance of MRR
Before considering revenue financing as a growth solution for your business, it’s important to get clear around your MRR trends and performance. It’s this data that provides a basis for a financing partner’s underwriting team to understand the health of a business.
MRR is a high-impact metric for measuring the performance of a company’s core business. It provides a helpful perspective for guiding short-term and long-term strategic decisions.
MRR has become a go-to-metric for understanding business health for a few reasons:
- It provides an indication of whether a company is stable
- It is straightforward to interpret
- It can be used to calculate how much a business can afford to spend on marketing
- It accounts for components of the business
- It prepares companies for fundraising milestones (i.e. venture capital investment)
With MRR as a frame of reference, investors, executives, and other business shareholders can easily establish a shared perspective around business decisions such as how quickly to expand, how much to spend on marketing, etc.
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 MRR performance.
How revenue financing works
The key benefit to revenue financing is that borrowers can access capital quickly.
If approved for revenue financing, eligible borrowers can withdraw funds as needed for working capital. Some borrowers use revenue financing as part of a portfolio of other financial products to reduce the cost of managing cash, overall.
Every revenue 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. There is usually an application process to start. 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 would go through a credit underwriting process. This entire process can happen within 48 hours for most companies due to Capchase’s sophisticated and proprietary CapScore™ underwriting algorithm.
Payback terms explained
Every revenue financing company has its own policies and procedures for terms of repayment. The first step is to determine a repayment schedule as part of a percentage of 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 overextend on capital or offer hard-to-repay terms. Capchase values fairness and transparency in all 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: