Launching a business is hard enough, but scaling it to a successful and lucrative exit is even more difficult. Securing early-stage venture financing is usually the best way to accelerate and sustain growth, but with various funding options available, how do you figure out the best course of action? What is the best alternative to VC, and at what point in your company’s growth do other funding sources make sense?
Choosing the right financing partner can be tedious, as they need to align with your mission, values and objectives. Otherwise, you get stuck in a relationship that doesn’t align with your goals and may lead you ending up with lower ownership than expected.
Here’s a rundown of how alternative financing came to be, how it can benefit high-growth SaaS startups and how to know if it’s right for you.
There is a dearth of non-dilutive financing options for growth-stage, recurring-revenue businesses. We’ve found that traditional sources of debt capital (such as banks) simply prefer to provide debt to asset-heavy businesses where collateral can be secured.
Every dollar sitting dormant in a savings account or any traditional short-term/liquid debt instrument is vulnerable to a real loss in value as inflation skyrockets.
When it comes to SaaS or asset-light business models, there simply isn’t an asset base to collateralize, which makes traditional debt providers uncomfortable. Moreover, while subscription or recurring revenue business models aren’t technically new, they have been undersupported. SaaS companies can often only look to traditional banks for financing after achieving profitability and/or receiving institutional venture capital backing.
This rules-based approach is pragmatic, but results in a massive gap in the market for early-stage companies that have achieved product-market fit and serious revenue traction. If they don’t fit the “checklist,” they simply get thrown into the backlog until all the boxes can be checked off, regardless of the underlying traction.
Revenue financing allows founders to have more control over their decisions without compromising board seats. SaaS companies can especially benefit from this model, as it advances future revenue from customers who are already signed up.
Revenue financing enables companies on a healthy growth trajectory to instantly access future cash flows from their customers’ monthly payments. Another benefit is that the borrowers’ credit limits can adjust according to their monthly expected growth, and they can draw funds when they need them.