Business growth is proportionate to expanding a company's reach, revenue, and market share over time. It involves making strategic decisions, taking calculated risks, and continuously adapting to evolving market conditions. Without a clear growth plan, a start-up risks falling behind and failing to capture new opportunities.
Entrepreneurs building a business in today's rapidly changing market are likelier to face many challenges than their peers some decades ago. The biggest among these are the ongoing funding winter and changing geopolitical dynamics.
Additionally, interest rates are rising due to inflation, causing venture capital and debt funds to become scarce, making it increasingly difficult for start-ups to secure capital. In such a scenario, Recurring Revenue Financing (RRF) can provide sustained growth for a business.
What Is RRF?
A recurring revenue business model provides customers access to a product or service in exchange for regular fees charged at scheduled intervals. Through such models, businesses can count on consistent revenue streams as customers purchase the product or service regularly, which is the basis of RRF.
RRF is an alternative form of financing that businesses can use to raise upfront capital by leveraging their revenue streams. RRF uses the facilitator platform's proprietary algorithms to integrate with the client's accounting and invoicing software to collect revenue data.
The algorithms then examine the client's financials and accounting data to determine a trading limit. Once that limit is set, the founder can instantly trade futures contracts to raise funds.
In dynamic market conditions and volatile environments, where the focus on business growth is necessary to sustain a business, venture capital and debt funding have become even more inaccessible. This is the problem that RRF can resolve by allowing companies to make use of their earning potential to raise capital, minus the hassles of traditional funding.
The Many Ways Of Using RRF
Recurring Revenue Financing is a flexible way of raising capital and accessing it as and when required. Depending on the business and industry, it can be used in ways specific to the individual needs of a business.
For instance, entrepreneurs can utilise it as growth capital for their sales and marketing budgets. They can also use it to boost their top line by acquiring new customers, expanding into new geographies, and even getting higher annual recurring revenues and valuations.
In one instance, an Indian growth-stage venture-funded marketing-tech company had an offer of $0.8 million from a VC for a 15 per cent dilution. Instead of proceeding with the offer, the start-up chose to leverage its recurring revenue streams to get a $150,000 limit, which it used to hire better tech talent and improve the product offering. Within six months, it got another offer for $1.1 million for a 10 per cent dilution. In this way, RRF can delay a business' dilution for a higher valuation at a lower.
Complementing Existing Capital Stack
RRF can also complement VC, or any other form of capital, for instant cash and lower dilution, as demonstrated by an early-stage Bangalore-based edtech SaaS company. It was raising $2 million for a 20 per cent dilution before starting on a recurring revenue stream.
The start-up raised $1.5 million for a 15 per cent dilution, complementing it with a $400,000 recurring revenue finance line. While the recurring revenue capital was deployed within 48 hours, the VC capital took over six months.
In addition to its convenience, alternative financing platforms offer several other advantages. One of these is the potential for increased funding as the start-up's recurring revenue grows, resulting in a higher trading limit. Companies that provide financing typically strive to offer flexible and straightforward financing options with no restrictive covenants.
Start-ups, therefore, have control over their funds and can allocate them as they see fit. In many cases, there are no onboarding or commitment fees. A single fee is charged when contracts are traded, and capital is drawn, enabling a mutually beneficial long-term partnership between the start-up and the platform.
RRF's Use In The Long Term
RRF provides businesses with a flexible and effective way to finance their growth. With the benefits of quick access to upfront capital, flexibility in financing, and the ability to retain ownership, it can become a game-changer for budding start-ups looking to grow sustainably and responsibly.
By taking advantage of alternative financing platforms, these entities can access funding tailored to their revenue cycles, allowing them to invest in growth initiatives without sacrificing control or equity.
As more and more businesses move towards digital-heavy, asset-light models, the appeal of non-dilutive financing options like RRF is only set to grow. With the potential for long-term benefits, RRF is a funding option that businesses should consider for their sustainable growth strategies.
Written by Eklavya Gupta, co-founder at Recur Club