At our virtual event Growth Financing for SaaS Founders, Miguel Fernández (co-founder and CEO of Capchase), Immad Akhund (co-founder and CEO of Mercury), and Jason Garcia (head of Capital, Mercury), discussed the rise in SaaS financing options for founders to grow their businesses, and how these growth financing options can be used in conjunction with venture capital.
Watch our event video below and read through our key takeaways of how startups can better leverage SaaS financing to grow their companies.
The rise in alternative forms of SaaS financing
As your startup scales, determining when, why, and how to raise capital becomes increasingly critical. Traditionally, SaaS startups have turned to venture capital to meet their funding needs. However, equity financing isn't always the optimal choice. It's best suited for launching new products or conducting experiments with potential high rewards, though it does come at the cost of diluting your ownership stake.
Different business milestones will require varying amounts and types of capital. For instance, venture capital might be ideal for launching an experimental new product, while inventory financing could be better suited for stocking up on goods ahead of a supply chain crunch.
“A company has all of these different gears that it invests in, and it’s important for funding to get more specific to match those gears,” Jason explained at our event.
These gears can include credit cards, debt financing, and recurring revenue-based financing —the latter is what Capchase offers.
Capchase CEO, Miguel Fernandez, notes that interest in alternative SaaS financing options has surged over the past few years. When the pandemic struck, the U.S. government provided subsidies to startups, helping founders acclimate to new forms of capital to keep their businesses growing. Additionally, with more seasoned entrepreneurs in the ecosystem, there's a greater awareness of the after-effects of equity dilution and a growing preference for alternative financing methods.
Recurring-revenue SaaS financing and venture capital
Recurring-revenue SaaS financing allows companies with steady income streams, such as monthly subscriptions or annual contracts, to access future revenue upfront. For example, if your company has 12 customers each paying $500 per month in subscriptions, a recurring-revenue financing provider might offer you a six-month loan of $36,000, with a monthly repayment plan and an 8% interest rate. This interest rate can vary depending on factors like your company's maturity, the quality of your contracts, and your repayment consistency.
One of the key advantages of recurring-revenue loans is that they come with no fees, warrants, or stock options attached. For example, Capchase offers these loans starting at a minimum of $50,000.
Recurring-revenue SaaS financing is particularly beneficial if:
- You’re acquiring a business with a stable income stream, such as $200,000 in annual recurring revenue.
- You plan to invest the funds in areas of your business with predictable growth, such as marketing, hiring, or professional services.
Additionally, recurring-revenue financing often complements other forms of SaaS financing, including venture capital. In fact, many VCs encourage companies to take on debt, particularly around the time of a Series A.
This type of financing can enhance your company’s valuation for future fundraising rounds and help you achieve key milestones before seeking additional equity financing. As Miguel Fernandez explains, “What recurring-revenue financing is doing for VCs is making VC funds go way longer. A company can go for much longer and raise at a higher valuation next time.”
If a recurring-revenue loan is perceived as a liability by a VC—perhaps due to concerns about potential churn in your subscriptions—you can mitigate this by consistently repaying your loan, which also helps build trust in your business.
Keep in mind: loans based on recurring revenue depend on the quality of your subscriptions. If your contracts churn, your company will be on the line to pay back its loan.
While recurring-revenue financing offers many benefits, it may not be suitable in certain situations:
- If a market shock threatens your contracts, this could jeopardize your ability to repay the loan.
- If you plan to use the loan for unpredictable ventures, such as developing a new product without forecastable returns, or for non-revenue-generating expenses like office snacks, this could pose risks.
- If your company is growing very quickly, you may need to repay the loan faster than anticipated, which could strain your cash flow.
To explore Capchase's revenue-based financing options, including our Grow and Pay products, visit our website.
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Thank you to our partners at Mercury. Check out Mercury Capital to learn more about its growth financing options.
