November 10, 2022

Subscription-based Financing: Everything You Need to Know

It's like Netflix for Funding Purposes…we tell you how and why!

As of March 2022, India boasted at least 65,000+ start-ups. Most of these firms are currently working towards a solid online presence. There's not an iota of doubt that more and more start-ups will soon attempt to dominate the digital space with a subscription-based model, along with the existing SMEs. For these entrepreneurs and founders, clearly, subscription-based funding is what will help truly unlock a ton of opportunities, leading them to scale up.

Wondering how?

Let's explore with BridgeUp how subscription-based funding can be a game changer for the funding needs of your subscription-based services.

What Is Subscription-based Financing?

It is a funding model that allows your firm to raise capital, especially when operating with a recurring revenue model. This financing option helps firms quickly exchange their recurring revenue streams (annual or monthly subscription) for cash and doesn't involve diluting the stocks.

No doubt Software as a Service (SaaS) and other businesses based on subscriptions need financing for expansion. The option of stock dilution can sometimes prove to be costly for these businesses. This is where the SBF model comes into play as an ideal solution, by making capital available quickly.

But what about your investors? The recurring revenue's maturity, coupled with predictable cash flow, is almost similar to an asset profile that yields fixed income. This means even the investors benefit from lending capital to your firm under an SBF model.

Besides, looking into alternative lending options has become more crucial than ever with the rising inflation brought about by the COVID-19 pandemic and the crisis in Ukraine. Even investors have become more cautious in evaluating the risks surrounding investment choices. The profitability of the business has turned out to be one of the biggest concerns when making any such decision of pumping money into a firm.

This needs financiers to strike a good balance between the levels of risk, the interest rates on debt and the way money is lent to the market. As it appears, the only way investors can make the most out of their revenue-based financing company is when they have accounted for and minimized perceived risks.

Even though chances are your subscription-based business would get the desired funding once it's profitable, you might face an array of issues in managing the funds. Hence, initially, you’d need to focus on certain metrics and targeted accounting to get your finances under control.

Here are some best practices that can help in managing the financing accessed through the SBF model:non

Position your recurring revenue at the heart of the accounting system

For the subscription sector, accounting systems grounded in traditional business models are barely enough to meet the unique needs of SaaS or other subscription-based businesses. This means your accounting systems need to prioritize recurring revenue way more than 'just' sales or acquisition.

Focus on customer lifetime value (LTV)

Emphasizing customer LTV is likely to move your subscription-based services closer to success. Your main concern should be the way a customer can generate revenue over time. Naturally, customers with high LTV will be better able to define how profitable your business becomes in the long run.

Spot early churn indicators

Some behaviors and signs are known to be early indicators when it comes to your business's churn rate. Ideally, before the churn rate goes out of hand, you need to pinpoint these indicators to reverse course. Some of these indicators you must consider immediately are listed below -

Decreasing rate of usage
Decreasing levels of customer-business interaction
Dramatic changes and shifts in the industry
Changes in accounts, organization, economic model, and business model

Develop a multifaceted strategy for retention

A multifaceted retention strategy can help your brand in adapting and develop your approach to sales and marketing in real time. Dedicating your resources to come up with such a strategy would lead you to identify customers likely to churn and implement tactics to prevent churning.

Optimize pricing

Optimized pricing can also act as the silver bullet for your subscription business. Simply make sure that your pricing has been researched well, and this could score you a substantially large customer base. But to do this right, you have to consider multiple pricing methods so that your services can be valued competitively.

Subscription-based Financing: How Does it Work?

The SBF model works best for an array of subscription-based businesses. These can include SaaS, Ed-Tech, D2C subscriptions, and many other entities running on annual, quarterly and monthly subscriptions.

Wondering how exactly to get your hands on the capital with such a financing method? You need to address subscription-based financial planning with as much detailing as possible.

Here are specific steps that can help:

Start with connecting all day-to-day tools with your financier. This includes your bank account, accounting software, app store connects, and the different mobile app tools you might be using to offer your subscription-based services.
Now, with this information, your provider of subscription-based financial services can work with detailed insights into your business and make evaluations on the firm's future success.
Followed by the assessment, you are likely to get the funding in a matter of days or even hours.
Then you need to regularly reimburse the subscription-based financing services provider with monthly installments, having a transparent commission above the borrowed amount.

This means that with SBF, you get to be in the driver's seat, keeping 100% of your capital. As you already know by now, it is a non-dilutive option, and you need no personal guarantees to necessitate the loan.

It doesn't come with any hidden fees, which means you know the exact amount that would be charged each month from the beginning. Don't worry about being punished for growing fast, as you wouldn't be repaying more than what was initially decided.

That said, you should still consider the catch before opting for this financing option. The most important limitation underlying any kind of B2B or B2C SBF model is how much capital can be raised with it. For example, imagine you need to make some heavy investments to secure increased customer outreach. In this case, even though it can form a part of your process of funding, SBF isn't likely to cover all the expenses.

So in what kind of situations can the SBF model work the best? That can be the case when you already have the needed traction or are in immediate need of flexible and non-dilutive solutions to your funding concerns.

Should You Choose Subscription-based Financing?

You should consider opting for the SBF model for financing your business only when you know it can meet all your needs.

Here are some of the reasons why you should consider SBF for your subscription-based business.

An immediate financing option

The SBF model is all about backing a quick process. With just a click, you can successfully trade contracts and raise funds. Typically, you can access the funds in real time to address your needs through effective subscription-based financial planning. This means the process eliminates any requirement for monthly investor visitations to secure access to funding.

Founder-friendly capital

Many young founders may find it excruciatingly difficult to get the attention of angel investors. As an alternative to this, SBF is likely to prove itself useful in backing immediate business expansion by supplying upfront capital for the same.

No more debt or share dilution

This is one of the key features of the SBF model. As the owner of the fundraising firm, it lets you strike the right balance between securing capital stacks and avoiding dilution of shares or debt simultaneously. A non-dilutive source of fundraising doesn't end up imposing operational or financial covenants. This suggests you can take full control of operational decisions and pursue growth exactly how you deem fit.

Business growth acceleration

Traditional lenders can be reluctant to offer funding to subscription-based start-ups, particularly due to two reasons. Either there is a prominent absence of assets that can be taken as collaterals, or it is difficult for them to assess your business model right. This is clearly not the case with SBF. It can absorb such difficulties promptly and come to the rescue of your firm's growth interests.

Reduction in monetary defaults and non-performing assets (NPAs)

Subscription-based financial service providers generally use data-driven state-of-the-art methods to assess the borrower's potential. The business fundamentals and the market position of the borrower play a great role in this evaluation process that involves meticulous diligence on the part of the provider. In other words, subscription-based financial services providers are only likely to take you seriously if you have a legitimate capital-efficient start-up. This means that the stringent measures taken by them are going to reduce any risks entailing NPAs and monetary defaults.

The bottom Line

India's start-up ecosystem is witnessing exponential growth, especially when it comes to the emergence of innovation and technology start-ups. Industry gurus claim this is only the beginning of something greater. This means competition for securing funds is likely to get more intense.

Fortunately, SBF can truly be your holy grail to access immediate, upfront, and viable funding while you also get to keep your business debt-free.

We at BridgeUp can help in getting your way around all the technicalities that come with SBF. We are here to take the burden of cash off your shoulders by lending you access to upfront, immediate, and quick access to funds. Especially if your business comes with high revenue predictability, you can help us make the process of arranging funds more hassle-free and flexible for you.

As India's first recurring revenue trading platform, we’re dedicated to offering you some amazing tailor-made options to raise funds. So what are you waiting for? Sign up with BridgeUp now and help us fund you.

FAQs

Do I need to make payment upfront for signing up for BridgeUp?

Not at all. Sign up for free without paying any charges.

Is my company suited for BridgeUp?

BridgeUp is a great fit for companies with a subscription-based model that rely on recurring revenues. Currently, most of the organizations connected with our platform are SaaS businesses. But the good news is that BridgeUp is industry-agonistic, and any individual or business having predictable recurring revenue streams may sign up with us and trade their customers or contracts for upfront instant capital.

Who are the investors at BridgeUp?

Our buy-side currently comprises Non-banking Financial Companies (NBFCs). These firms place their bids entirely based on the performance of your business. The identity of your business is strictly kept anonymous to our investors.

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Zeus Dhanbhura

CEO at BridgeUp