April 7, 2022

How to lower your cost of capital using Capchase Earn

It’s important to make responsible decisions as a startup founder. Capchase Earn is a tool you can use to run a stable and high performing business.

Cost of capital is an important metric for high growth SaaS companies. 

Especially if you’re planning to raise VC funding or institutional investment, it’s important that you maintain a clear perspective into what this metric means for your business’s immediate-term health and long-term stability.

We’ve prepared an overview of the topic, along with a description for how Capchase Earn fits into the bigger picture of startup financials.

Why cost of capital is an important metric

Cost of capital is a metric that helps investors justify the feasibility of a project. In other words, can investors and lenders be confident that the business operation will deliver on its promises? 

With this perspective, cost of capital is all about risk. The metric communicates, to senior leaders at funds, whether a project is practically feasible. The return needs to be worth it for the investor who is choosing whether or not to commit capital to an investment. For this reason, startup finance teams will build a risk buffer into the cost of capital metric, as a cushion, to be extra cautious.

When calculating cost of capital, companies commonly use a weighted average that considers both the cost of debt and equity capital. Every industry and business has its own unique cost of capital. It’s up to individual investors to determine their ideal thresholds for investing, based on the picture they are presenting.

How Capchase fits into the equation

Capchase, as a company, evolved out of our founding team’s vision to create tailored lending products for high growth SaaS companies with monthly recurring revenue (MRR) subscription models.

Our core product, a programmatic financing solution, solves a common problem that startups face, in not having access to cost-effective working capital. It costs money to borrow money, so it’s up to startup finance teams to determine how to use working capital in their businesses.

With Capchase, high growth startups have the extra benefit of a financing solution from which it’s possible to take draws for working capital. Essentially, this core product is a revolving line of credit. It’s non-dilutive, which means that founders do not need to give up equity in order to access this funding.

Capchase Grow + Capchase Earn

Capchase Earn is an account backed by FDIC and DIF insurance, where Capchase Grow customers can park their idle cash. The FDIC insures up to $250,000 and DIF insures the rest.

With Capchase Earn, Capchase Grow customers can offset their cost of capital. As a result, high growth companies can extend their runways and demonstrate efficiencies in their metrics for investors.

For example, one of our customers, Nowports, a provider of global freight solutions, explains how the company uses Capchase Grow + Capchase Earn together. The two solutions help the company stabilize its operations in light of rising freight costs.

With Capchase Earn, Nowports earns interest on their idle equity fund, which brings the total cost of their capital down to 1-2% overall on average. 

Capchase Earn key details

There’re a lot of moving parts for how Capchase Earn works, especially if you’re new to the mathematical terms explained. Here are some key points to quickly skim, based on frequently asked questions that we receive:

  • Capchase Earn is an FDIC and DIF insured account for parking idle cash 
  • The account generates consistent earnings, based on continuously compounding interest rates
  • Each day, you’ll accrue a portion of those earnings equally over the days in the calendar year
  • Each month, you’ll receive a payout to your Capchase account based on the number of days in that month.
  • Capchase applies a monthly payment to your Capchase Earn account based on the average daily balance of your account at an effective annualized rate when used in combination with Capchase Grow
  • Capchase Earn is most optimized for businesses when they use it in tandem with Capchase Grow

Rates and results vary, are subject to change based on market conditions, and are based on your business’s unique circumstances. The best way to determine whether our product is a fit for your needs is to have a conversation with our sales team. We look forward to your questions.

Learn more about Capchase Earn, to see if it’s a fit for your business.