The alternative lending space is evolving. Recurring revenue loans truly define why.
Since the red moves made in the tech sector have slowed down in 2022, hiked-up inflation rates seem to be nudging many investors to prioritize their financing safety, above all.
To cite an example, the merger and acquisition activity in the media, technology, and telecom sector sunk from $617.4 Billion USD in the latter half of 2021 to $349.9 Billion USD in mid-2022. This means businesses need newer ways to raise capital. Can recurring revenue loans help?
Let’s find out together in this article!
Recurring revenue loans (also known as royalty-based financing) are funds granted based on recurring revenue streams of the enterprise and the future earnings they are expected to bring in. The lender analyzes the viability of the revenue stream as part of the borrower’s credit analysis and then makes the loan available to them.
This is especially helpful if you have a startup; recurring revenue loans can help meet all of your business requirements in exchange for a portion of the projected earnings.
RRL payouts continue for a predetermined period, and you don't need to pay the investors anymore after they've received their agreed-upon amount. This decided amount is generally much higher than the invested amount, ranging between 3 to 5 times the amount invested. While the monthly repayable amount is not fixed, it can be anywhere between 1% to 8% of the revenue generated by the business the month before.
Recurring revenue loans entail variable repayment tenures. This depends on how much the company has earned in a month or so. So recurring revenue loans can offer you an easy alternative to conventional options around equity-based funding.
You might find recurring revenue loans appealing for another reason, and that is - as a startup owner, you won’t need to compromise your ownership. This is similar to debt financing.
However, like equity financing, you also stand to get the required capital from your investors. You do this by selling company stocks/shares in exchange for cash and giving up some control over business decision-making.
As you would have understood by now, recurring revenue loans are basically an amalgamation of equity and debt financing - the best of both worlds. What’s more — you don't need to worry about any fixed payouts. It also doesn't generate interest on unpaid balances.
Let's learn more about how you can have recurring revenue loans working in favor of all your startup needs with BridgeUp.
Consider the following features of recurring revenue financing that can be truly startup-friendly:
During the initial phases of business development, firms generally seek revenue-based loans from different lenders. These can include a private equity firm or a business development company. The investment is secured based on particular purposes, such as financing market costs or scaling up startup operations.
Before approving any such loan, investors generally look into the expenses underlying the activities the firm wants the funding for. During this phase, the revenue that can be potentially generated by the business is also factored in to ensure that a fair percentage is decided for monthly repayments.
Whatever may be the reason for applying for the loan, the principal amount is decided and agreed upon by both the lender and the borrower. This loan is repaid gradually, and this is based on a fixed percentage of the projected earnings of the business. These predictions are arrived at from the past earnings of the same.
The monthly repayable amount typically does not need to be paid by a set period, as this amount largely depends on the monthly revenue generated by the firm, which can vary. This means if a business is slowing down in terms of earning profits, the loan would be paid at a slower pace. But, of course, the loan can be paid quickly with higher monthly revenues.
At this point, we should turn our attention to how recurring revenue loans are different from equity or debt-based financing options. While no set payment is required under equity financing, it ends up diluting the company's shares to meet lender conditions. When it comes to debt financing, it can be riskier for borrowers as the money needs to be repaid within a fixed period.
Contrary to both these financing options, recurring revenue financing involves the preferable characteristics of both these traditional approaches to financing. This is the case as funds are lent based on the future earnings of the firm, and no fixed period is set for repayment.
This means your business can avail of a non-diluting financing option during the earlier stages of development, even if you don’t have many assets to secure debt financing loans from banks. If you can show your business is generating monthly revenue consistently, you can easily convince different revenue-based financing businesses to fund you. Even as a startup operating for one or two years, if your firm has concrete recurring revenue and a plan that can pursue this growth further, it’s likely that many revenue-based financiers would be interested in supporting this growth.
Now, how to determine the amount that your business can borrow as a recurring revenue loan? This directly depends on the Monthly Recurring Revenue (MRR) and the Annual Revenue Rate (ARR). MRR helps in measuring the revenue the firm has earned over a set period of time, whereas ARR is all about the potential amount the firm is expecting to generate in the future.
When it comes to most investors, this loan amount is set to be between 4 to 7 times higher compared to the MRR and a maximum of one-third of the ARR. As far as the monthly repayment percentage is concerned, generally, it is set at 1% to 2% of the monthly revenue generated by the firm. In some cases, the percentage can be as high as 5 to 20%.
With our discussion on recurring revenue loans, you probably think recurring revenue financing is great for Software as a Service (SaaS) businesses. And you're right about that.
Businesses that offer recurring services to a subscribed clientele can actively make efforts to improve customer service, ensure greater market reach and explore opportunities in new markets. These activities can be backed-up by opting for recurring revenue loans, as this is indeed a flexible option to generate finance.
For example, if a SaaS business caters to small and mid-sized firms by offering integrated platform services and now it is looking forward to expanding its clientele, recurring revenue financing can pave its runway to bring in growth. This is because the repayments would depend on the MRR. The MRR can be particularly predicted before finalizing the loan according to the firms' structure.But what about other businesses and their specific financing requirements? For example, can a business operating in medical technology benefit equally from recurring revenue loans as a SaaS firm would? The answer to this question is Yes. This firm can also increase the funding round consistently without triggering premature dilution of equity. This meets both of the firm's requirements of gaining flexibility in repayments and drawing down investment later on.
In this case, it is compelling how the upfront capital’s availability can help the company in funding healthcare facilities and improve its overall market share. Besides, the ownership structure of the firm would also stay undisrupted. This means the firm can now channel all its focus towards scaling up and doesn't have to worry about changing equity.
Finally, we can also consider another example of a data user identification firm. Say, the main purpose of this firm in choosing the recurring revenue financing route is to improve sales and explore new markets. In this era, when consumers interact across different digital channels, this company can have a promising future. It is likely that such a business wouldn't find it difficult to enter a fairly-termed agreement that offers it a high principal funding amount while also including opportunities for capital disbursements when the firm meets certain milestones.
Here are some of the advantages of recurring revenue loans:
Many new-age startups are opting for asset-light digital-heavy business models, and this can pose a difficulty for these businesses if the investors want to look into the assets to collateralize the funding.
You can remove this major hurdle by simply opting for recurring revenue lending, as this wouldn't require any collateral. Be rest assured that your investors won’t be able to sell your assets even when your firm is facing trouble with repayments.
While conventional loans can take up to months for approval, with revenue-based financing, raising capital can be done in just a few days.
In business funding, you can easily compare the concept of flexibility with air. You wouldn't figure out its true value until you actually need it. Imagine how burdensome it can be to squeeze business spending elsewhere to meet the fixed percentage of the repayable amount each month, especially when revenue generation becomes slower. Recurring revenue lending would not demand this from you as it is tailored to your firm's revenue cycle.
Revenue-based financing is already cheaper than selling your equity. By choosing this route for financing, you can also prevent your investors from having any control over how your company is run.
While the best way to finance a business can essentially vary according to its size and sector, recurring revenue loans can indeed open up new avenues for funding businesses that are growing fast and operate with a digital-heavy asset-light model. The alternative lending space is expanding specifically to cater to these businesses, given the appeal of non-dilutive financing.
At BridgeUp, we specifically focus on your needs to raise capital, ensuring that it is made available to you upfront, instantly, and quickly. If you have high revenue predictability, understanding your flexible hassle-free funding needs becomes easier for us.
As India's first Recurring Revenue Trading Platform, we can help you with tailor-made options to raise capital. Sign up with BridgeUp now or call us at +91-9819660287 to help us fund you.
With BridgeUp, you no longer need to see venture capital as your only source of funding. We offer businesses an opportunity for growth without them having to face premature ownership dilution to founders or early-stage investors. You can also attain a greater valuation for the later rounds.
We at BridgeUp, offer you an outright revenue sale — allowing recurring revenue loans to take the burden of cash off your shoulders. Our investors would not have any claim when it comes to your firm's assets. As the repayable amount is fixed according to sales, the cost of capital trading is both more predictable and cheaper compared to revenue-based financing models.
Presently, our buy-side consists of Non-Banking Financial Companies. They place their bids solely based on how your business is performing. Your company’s identity remains entirely anonymous to our investors.