How to leverage financing for growth using a revenue-based model

Afshan Qureshi
Afshan Qureshi
Content Marketing Manager
Posted on
September 1, 2023
min read
How to leverage financing for growth using a revenue-based model

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:

  1. Expand headcount
  2. Invest in marketing
  3. Accelerate product development
  4. Invest in establishing systems
  5. Improve overall capital efficiency
  6. Reduce the cost of growth
  7. Gain access to cash, expediently

The idea is to use capital in a way that enables growth.

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Using MRR to leverage financing for growth 

Before considering revenue-based financing as a growth solution for your business, it’s important to get clear about  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 a company’s core business 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 paints a picture of performance that accounts for many components of the business.
  • It prepares companies for fundraising milestones (i.e. venture capital investment rounds).

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 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:

This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal, or tax advice.

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: