When companies are ready to scale, they often run into the challenge of lacking enough growth capital to adapt to the real-time needs of their market.
Revenue-based financing is a solution that addresses this pain point by providing cash to companies, upfront and on demand. It is a type of financing that provides capital upfront against monthly or annual recurring revenue (MRR or ARR).
As a form of financing, it resolves the bottleneck of not having enough financial capital on-hand to keep funding growth. From this perspective, revenue-based financing is a tool for companies to effectively manage their cash flow, avoid slowing down, and continue to scale responsibly.
If you’re thinking about applying for revenue-based financing, it’s important to know a few basic concepts when considering lending options. We’ve put together some tips to inform your financing journey.
Here are some frequently asked questions, along with some answers:
Read on to learn the answers.
Revenue-based financing is a concept that you may be learning about for the first time. So why haven’t you heard about this option from your CFO, advisor, or bank already?
The short answer: you simply may not have come across it yet.
The reason why is straightforward: revenue-based financing is a relatively new type of financial solution. It began growing in popularity with e-commerce and software as a service (SaaS) business models.
Over the last decade, there has been a boom in the number of recurring revenue-based businesses with predictable MRR (monthly recurring revenue) and ARR (annual recurring revenue) metrics. During the COVID-19 pandemic, many of these digital-first businesses began to experience unprecedented growth due to the rise of online shopping. In times of expansion, companies risk running out of capital.
In response to this economic trend, specialized financing providers like Capchase have designed new products to keep up with the needs of the market. Revenue-based financing providers all have their own unique methodology and approach to creating their solutions. Different companies may also use different terminology, so it’s not always straightforward to make a direct comparison between revenue-based financing solutions. Companies need to choose the best option for them.
As an example, at Capchase, we have begun using the term programmatic financing to describe our position in the revenue-based financing space. Our team uses a strategic blend of proprietary CapScore™ technology (intended to remove bias from financing decisions), and human attention from skilled underwriters to ensure that our customers receive the support that they need.
Founders and executive teams can use revenue-based financing capital across areas of the business. As with other types of business financing solutions, some providers may have compliance-driven requirements for how funds may be spent.
Here are some examples of how Capchase’s customers are using revenue-based financing:
Every business is different, so it’s important to consult with your financial advisor before introducing new debt products to your company’s finance stack (finstack). The key is always to make responsible decisions.
Capchase uses intelligent proprietary CapScore™ software to ensure that borrowers are able to make scheduled repayments. This technology accounts for the schedule that companies need to achieve a business goal. As a result, customers can more effectively manage their working capital and cash on-hand and avoid repayment terms that have the potential to be risky.
Capchase’s software integrates with major banks and accounting services. With this data flow, Capchase can maintain continuous and real-time visibility into the borrower’s financial operations.
In addition to capturing data, Capchase’s underwriting team also performs due diligence to evaluate future revenue objectives. With this picture, Capchase calculates the repayment terms.
With this equation and working capital infrastructure in place, companies gain more control over their cash on-hand.
There are several reasons why people opt to go with revenue-based financing to access working capital:
Venture debt is a type of debt financing for revenue-based companies. Examples include growth capital, accounts receivable financing, and equipment financing.
These types of financing are available to companies that do not meet the criteria of a bank loan and may require repayments at regular intervals. In this regard, venture debt is more similar to a traditional lending product.
Similar to revenue-based financing, venture debt products are specialized and tailored to specific business use cases. Every lender is different, with their own unique underwriting requirements and terms.
Typically, borrowers use venture debt to extend the capital obtained during the first rounds of financing via venture debt.
To get an offer from Capchase, the first step is to register for an account. You can also contact firstname.lastname@example.org for answers to your questions. It may be a good idea to compare options from different lenders.
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.