At our virtual event Growth Financing for SaaS Founders, Jason Garcia (head of Capital, Mercury), Miguel Fernández (co-founder and CEO of Capchase), and Immad Akhund (co-founder and CEO of Mercury) discussed the rise in financing options for SaaS founders to grow their businesses, and how these options can be used in conjunction with venture capital.
Watch our event video below and read through our key takeaways.
The rise in financing options
As your startup grows, when, why, and how to raise capital become pressing questions. Traditionally, SaaS startups have looked to venture capital to finance their needs. However, equity financing is not always the right option. It’s best-used for new products and experiments that might have big pay-offs, but will also dilute your ownership in your business.
Different milestones will require different amounts and types of capital—for example, you might use venture capital for launching an experimental new product or inventory financing to stock up on goods when you expect 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.
This includes credit cards, revenue-financing, and recurring-revenue financing—the latter is what Capchase offers.
According to Miguel, there has been an overall rise in interest in these financing options over the past few years. When the pandemic hit, the U.S. government offered subsidies to startups and helped get founders acclimated to new forms of capital to help keep their business moving. Additionally, there are more seasoned entrepreneurs in the mix than ever before—meaning that there’s also more expertise to share on the after-effects of the dilution that comes with equity.
Recurring-revenue financing and venture capital
Recurring-revenue financing allows companies with recurring revenue—say, with monthly subscriptions or annual contracts—to access their future revenue upfront. For example, if your company has 12 customers paying subscriptions for $500/month, your recurring-revenue financing provider might give you a six-month loan of $36,000, with a monthly payback plan and an interest rate of 8% a month. This interest rate might change based on factors like the maturity of your company, the quality of your contracts, and how consistently you pay back your loan.
Recurring-revenue loans have no fees, warrants, or stock options attached to them. In the case of Capchase, minimum loans are $50,000.
Recurring-revenue financing is a good fit if:
- You’re using it to acquire a business with a predictable income stream (e.g., $200,000 in annual recurring revenue)
- You’d like to invest the funds in aspects of your business with predictable growth, like marketing, hiring, or professional services
Additionally, recurring-revenue financing is often used as a complement to other forms of capital, like venture capital. Many VCs will even ask companies to put debt on the balance sheet, especially around the time of a Series A.
Recurring-revenue financing can help your business get a better valuation in the future and allow you to hit certain milestones before you go out for your next fundraise. “What recurring-revenue financing is doing for VCs is making VC funds go way longer,” Miguel explains. “A company can go for much longer and raise at a higher valuation next time.”
And in the case where a recurring-revenue loan is seen as a liability by a VC—for example, if they worry that your subscriptions will churn and your business will be adversely impacted by having to pay your recurring-revenue loan back—you can reduce the liability by paying back your loan consistently. This also increases trust in your business.
Keep in mind: recurring-revenue loans depend on the quality of your subscriptions. If your contracts churn, your company will be on the line to pay back its loan.
Recurring-revenue financing may also not be a fit if:
- There’s a shock in the market that threatens your contracts
- If you spend the loan on something unpredictable, like a new product without forecastable returns, or things that generate no returns, like snacks for the office
- If you’re growing very quickly and will have to pay back the loan faster than expected
If you're still not sure which financing option is the right fit for your business, check out Mercury Capital. We connect companies to financing recommendations with four simple questions.