Miguel Fernandez

Miguel Fernandez

May 1, 2021



min. read

πŸ“ˆ Just-in-Time Financing: What it is and why it is vital to your overall growth strategy

Learn what Just-in-Time financing is and what it means for your Tech business.

In a previous post, we described how much VC money SaaSCo founders should raise and how they might use that money to grow their business. Just like most things related to building a SaaSCo, the answer to both is largely about timing.

When you're just beginning to build your business, VC equity or debt is your best bet. But as your business grows, it’s important to realize there are less costly, more efficient funding options. Think of VC funding as the building blocks of a more comprehensive, dynamic financing strategy that, in later stages, should include Just-in-Time financing.

Before we describe such a dynamic strategy, let’s first review the four main financing options available to SaaSCo founders.

Static Funding - One large sum of cash upfront

With Static funding, the goal is to get as much cash as you possibly can during discrete funding events. The problem is, you don’t actually need all that cash, at least not right away. And whether it be through interest or by giving away shares of your company, you will pay for that cash that you don’t actually need.

Venture Equity - This is the most familiar version of startup funding yet it is also the most elusive and the most costly. If your company doesn’t show promise of becoming a unicorn, you’re unlikely to even get a meeting with a VC, let alone walk away with a term sheet. But if you do somehow pull off a round of equity funding, you will do so at the expense of ownership in your business. What’s worse is this dilution compounds over multiple rounds. If you give away 10% to 20% of equity round over round, by the time you reach an exit seven to ten years down the road, the average founding team owns less than 15% of their company. While equity funding is a good option at the very beginning stages of your business, it is not the only option and it will end up costing you dearly if deployed long-term.

Venture Debt - This option will spare you dilution but will cost you cold, hard cash, usually in the form of 6% to 12% interest. Also, warrants and transaction costs add up fast. Plus, your lender will impose a number of covenants and operational constraints on your business. And, as the salt in your interest-paying wounds, if there is some form of a liquidation event such as an acquisition, your venture debt will get paid first, potentially leaving you and other owners of the company with nothing.

Merchant Cash Advance - This model is based on your actual Monthly Recurring Revenue (MRR) and it pays in recurring installments. Find a lending institution who is willing to front you your MRR (usually 2x to 4x) in return for a percentage of your net monthly revenue. This model can work well for e-commerce businesses but for your SaaSCo that has long conversion cycles and fluctuating conversion metrics, it’s very hard to calculate how much this type of funding will cost you. And if you’re a rapidly growing SaaSCo, then the better you do, the more you will pay.

When to use which type of funding

At Capchase, we recommend SaaS founders pursue an initial round of VC funding in order to get the business off the ground. Call this pre-Product/Market Fit (PMF). But it is imperative that you only obtain as much capital as you truly need at that stage of your business. Once you achieve PMF and have that oh-so-valuable recurring revenue on the books, it’s time to tap into it. Especially as you continue to grow, there’s no reason not to leverage Programmatic funding.

Programmatic Funding - Only the cash you need, as you need it

Unlike Static funding, Programmatic funding happens in recurring installments and is designed to align to the dynamic nature of your business. It requires exceptional algorithmic modeling and data analysis but if done correctly, this strategy can lead your SaaSCo to a much stronger financial position.

Just-in-Time - With the Capchase model of Programmatic funding, we help you determine exactly how much capital you need and when and the system deploys that funding only when you need it. Unlike Revenue-Based Financing which charges a percent off your top line each month, Capchase charges a fixed percentage on each contract you finance. With a fixed percentage fee and a fixed duration for repayment, you won’t get dinged for growing your business as you might with the Revenue-Based Financing model.

To prescribe Programmatic funding, Capchase reads your business model and has a clear understanding of your cash inflows and outflows. As it prescribes the right amount of capital needed month by month, every dollar deployed is put to work immediately.

Compared to Static funding which typically sees an ROI of 1.5x to 3x the cost of capital, your ROI with Programmatic funding is usually between 8x and 11x. The reason is because with Programmatic funding, every dollar you deploy is being used to generate returns.

A Funding Strategy as Dynamic as Your Business

Since Programmatic funding only works once you have signed customer contracts and committed recurring revenue on the books, you will need an initial amount of capital until that happens. This is why an early VC round makes sense, to invest in PMF, build your team, and acquire those initial customers.

But once your business is post-PMF and experiencing high growth, instead of going back for more rounds of VC funding which will cost you more cash or further dilute your ownership, Programmatic funding is an ideal choice.

With such a combined strategy, founders typically see about half the dilution as those who pursue a pure equity approach. What’s more, because of your stronger financial metrics, you will typically see a much higher valuation down the road because you’ve spared yourself dilution and you’ve grown more efficiently.

The bottom line is that your SaaS business is dynamic and recurring by nature. You need a funding strategy that matches it.

Ready to learn what a Just-in-Time funding strategy can do for your SaaS business? Join the non-dilution revolution and get in touch with Capchase today!

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