Many startups struggle to find the perfect balance between cash flow and the need for capital reinvestment. While venture capital and angel investors are still the most popular funding sources for startups, they come with their own set of drawbacks — relinquishing stakes and authority in decision-making to the investors. The startup landscape is evolving rapidly and there is a growing need for a founder-friendly alternative method of raising capital beyond the options of traditional debt and equity dilution. Alternative financing is, hence, quickly becoming the standard for new businesses.
Several fintech startups have recognised this gap and have come up with a solution in the form of Recurring Revenue Financing (RRF). The RRF model allows startups to have a regular cash flow and helps optimize cash utilisation. The motive is simple – secure funding while allowing the authority to run a firm that remains in the hands of the founders.
This new-age non-dilutive financing option provides an environment that doesn’t force the founders to relinquish their valuable stake and relegate their position to in order to get the capital required for business growth.
Why Recurring Revenue Financing Model Is Ideal for Start-ups
Recurring Revenue Financing options are quick, convenient, tech-led, and a high probability solution for founders. The founders can secure and receive funding within days instead of waiting 3-12 months to see the cash with equity fundraisers. The swift fundraising process enables the founders to scale their business rapidly or take advantage of a relevant opportunity that may arise for a short window of time.
It is a flexible and accelerated way for the business to get a quick cash flow boost through non-dilutive funding. The best part of the deal is that the firm gets funding without charge creation, personal guarantees, or other restrictive financial covenants like traditional debt.
The unique mechanism of the Recurring Revenue Financing model helps startups and growing businesses convert their recurring revenue streams into upfront capital. They enable founders to get the lifetime value of their customers upfront which helps founders to match their cash inflows with their CAC outflows.
The Recurring Revenue Financing model also gives founders a regular source of income that can be used to fund their company as they scale. This means founders can get their product and service to market faster and increase revenue before financing from investors is required. This means the business scales faster and the risk for investors reduces by providing a proven revenue model with data to back it up.
How Does Recurring Revenue Financing Model Work?
Recurring Revenue Financing is a type of revenue model where customers subscribe to pay a regular fee for access to a product or service. The term subscription is often used in the context of SaaS (software as a service) and B2B (business to business) models but can also be applied to B2C (business to consumer) models.
However, before applying the Recurring Revenue Financing model, a company requires to establish a set of pre-requisites for successfully scaling the business:
Choose a business model: The type of business model will determine whether the selected model is under B2B, B2C, or SaaS.
Define value proposition: The value proposition outlines how the product solves a problem or improves the lives of the business’s potential customers.
Determine price: The pricing should reflect the value proposition and account for fixed costs, variable costs, and the profit margin a company requires to sustain its business.
Identify your target customer: The people who will subscribe to the service or product make up the target customer base. Understanding the target customer will help companies develop a value proposition that resonates with them.
Ways To Implement a Recurring Revenue Financing Model In Startup
Many tech companies have pivoted from the traditional upfront selling model to Recurring Revenue Financing model. Estimates suggest the growth of the SaaS industry has been fivefold between 2015 and 2021 and is clocked at $171.9 billion by the end of 2022.
There are financing platforms that integrate with the accounting and invoicing softwares (like Zoho, QuickBooks, etc) to automate the data collection process. The facilitator platform then examines the company’s financial and accounting data to determine a trading limit. Once this limit is set, the founder can trade future contracts to raise funds instantly.
Since these alternative funding platforms are built using cutting-edge technology, founders will have the luxury of withdrawing cash at the click of a button. Besides, the founders get the liberty to choose the quantum of capital depending upon the kind of cash flow their company requires during the transaction.
The ‘Ease of Doing Business’ on alternative financing platforms comes with other merits as well. As the recurring revenue of the firms rises, so does their trading limit, ensuring that the funding amounts grow alongside the business.