Revenue-based financing: the CEO’s guide

Miguel Fernandez
Miguel Fernandez
Co-founder & CEO
Posted on
September 13, 2022
min read
Revenue-based financing: the CEO’s guide

Founding Capchase came from first-hand experience of a classic SaaS business problem.

SaaS companies mostly have two ways of getting paid:

  • Customers pay monthly
  • Customers pay upfront, usually at a discounted price

If SaaS companies get paid monthly, they are financing their customers: because your SaaS business incurs upfront costs (CAC, implementation, sales commissions, etc), which get repaid month over month.

If a SaaSco gets paid upfront, then they are getting financed by their customer. But the  discount you likely have to give your customer to secure this upfront payment represents a very high cost of capital.

We thought there could be a better way. A way in which SaaS businesses could access funds earlier, without having to give up so much value in terms of discounts. So we built a product to help businesses get funding against their ARR, making them less dependent on expensive sources of capital.

What should founders know about revenue-based financing?

The structure of revenue-based financing is ideal for founders of SaaS companies.

It’s fast

Revenue based financing is something that you can set up in days or hours, versus the months-long process which is common in other forms of debt financing for SaaS companies.

That’s because it is primarily data driven. So instead of documents and a long process to set up, you can connect your data in three clicks, and then you usually get a percentage of revenue in terms of availability. So imagine: if you have 10 million ARR you can get, let's say 5 million in financing. And then that availability evolves. As the company evolves and grows, the financing you can receive grows too.

It’s flexible

The flexibility of the model means that you don't have to take all the money up front, you can take chunks to deploy over time. You can make sure that the money that you're using is deployed into a money generating activity and not just sitting in your bank.

With Capchase, you also get the expert assessment of the right amount of financing - or availability - and then of the correct amount that you should be deploying every single month. Contrast venture debt where you get a lump sum: you take it or leave it.

It’s one simple fee

And usually - at least, this is how Capchase works - there's only one simple fee. You usually repay a fixed amount every month. So you're not paying more if you grow faster. You're usually paying the same amount for the following 12 months or 24 months.

It mirrors your business model

You can plan ahead: you know exactly how much money you're going to be paying back, and how much money you can draw again in order to continue to invest. And it's aligned with customer payments. So you're not just paying off your balance sheet, you're paying back as the customers are paying in: that amount and timing is aligned with how much money you pay back.

Founders should think about aligning short and long term activities with sources of funds

Think about sources of funds. You have long term sources of funds and then short term ones.

So long term is equity and venture, where you get perhaps two, three or four years. And then shorter term financing is things like revenue based financing, where you get between 12 to 24 months.

And if you think about it, your company also has long term and short term initiatives.

Long term initiatives might be major product development, your game plan for new geographies, or acquisition of other companies. Then you have short term activities, which are marketing, sales - and associated costs like commissions - where if you know your economics, you know that if you invest X dollars here, you're going to get Y dollars over a certain period of time. You know your LTV, you know your CAC, you can figure out retention and so on.

So then the evolution that we're seeing in our customer base is that they're starting to use long sources of funds for long term activities, and shorter sources of funds for shorter term activities.

That means you use equity and long term debt to pay for engineers for new products, for new geographies, and so on. And then you use predictable revenue-based financing for predictable short-term activities like customer acquisition, marketing and sales, implementation costs and so on. Because you know that the return that those activities have is much higher than the cost of revenue based financing.

So the combination means that you're using something cost-effective and predictable for short term activities, and then expensive long term money for long term activities with uncertain returns. Which means that your runway can go way, way further - as opposed to using long-term money for everything.

Using long term money for everything can be the reason why companies need to raise equity all over again, prossibly when they’re not in the optimum position to get the best deal for themselves from VCs. Because they're using up all the equity for user growth. So if you fund user growth with much cheaper non-dilutive capital, the effect is a massively longer runway and much faster growth.

What not to do with revenue-based financing

I think it's a massive mistake to do two things.

On the one hand, to use the funds for certain types of long term activities. So imagine that you get the funds today, you invest them all into something that's going to reap benefits in three years, like a new product. But then you have to actually pay the money back faster than that. That can leave you in a tight spot. Because you have to return the money, but the activities that you invested in haven't returned that money yet.

And the second thing is that founders take too much money up front, and then they don't have anywhere to deploy it. But they have to start returning it, and are paying a fee, but haven't used the money to generate returns. So it's not as bad as the previous example, but it can also get you in trouble.

So my suggestion to founders would be this. Revenue-based financing is a transformative tool, when you see it in the right way and use it accordingly. I’d always recommend an incremental approach for the best results. Don't get all the money up front, because then you're just going to return it before you have  actually deployed it all.

So take it bit by bit, and make sure that you're deploying it into growth activities, which is the highest return that you're going to get as a founder.

For more learnings about financing and the state of fundraising, listen to the full discussion on the SaaS Open Mic podcast, by Chartmogul.

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