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This article was originally published on Forbes. You can read the original version here.
In Q2 2023, venture funding took a sharp dive, dropping 18% quarter over quarter and 49% year over year.
This downturn has made alternative financing options like revenue-based financing (RBF) and true sale-based financing (TBF) more appealing than ever. These options offer quick approvals and access to capital, providing a viable alternative to traditional venture funding.
Let's navigate these alternative financing routes, examining their potential benefits, challenges and risks.
Two Distinct Paths: Revenue-Based Financing Vs. True Sale-Based Financing
The RBF market is surging with a 61.8% CAGR, enabling entrepreneurs to concentrate on scaling since financing aligns with revenues. It's revolutionizing B2B, introducing a "buy now pay later" (BNPL) approach in the subscription economy—a critical edge for attracting customers.
Meanwhile, TBF has entrepreneurs converting assets into cash at unprecedented rates. But before diving in, it's essential to dissect the intricacies of these two financing strategies.
Revenue-Based Financing (RBF)
RBF provides entrepreneurs with growth capital by pledging a portion of gross revenues, repaid until a predetermined cap is reached. This sidesteps the limitations of traditional debt and equity dilution.
RBF is often more cost-effective than equity, as returns are linked to business growth. In some scenarios, entrepreneurs can effectively secure capital at near-zero financing due to the revenue-based repayment scheme.
SaaS firms can boost sales and sustainability by offering customer-friendly payment plans, thanks to RBF financing. Instead of a hefty $120,000 annual upfront fee, customers can pay a slight premium on a $10,000 monthly basis. The company still secures the full amount upfront from the RBF partner, optimizing cash flow for both parties.
As for financing costs? Either the business absorbs them or shares them with the customer, depending on contract terms and financial health.
True Sale-Based Financing (TBF)
In TBF, companies trade cash-generating assets to obtain liquidity quickly, setting it apart from conventional debt financing models. Instead of accruing liabilities, TBF offers a streamlined asset-for-cash transaction.
Like RBF, TBF provides entrepreneurs the luxury of avoiding personal guarantees and retaining full control of their companies, thanks to its non-dilutive nature.
Tech firms can strategically offload assets like IP and receivables, not just to infuse cash but also to sharpen focus on core competencies. By ceding all control and risk to the buyer, they can reallocate resources to high-impact areas.
Companies can also selectively sell assets that align with their long-term strategy, ensuring a more agile and optimized operation.
What To Choose: RBF Or TBF
Both RBF and TBF serve up quick access to capital, but here's where it gets interesting for tech entrepreneurs. They don't have to pick one. A savvy mix of RBF, TBF and other funding options can be tailored to optimize a company's capital structure.
It's not an either-or game; it's about creating a financial strategy that's as dynamic as the business it fuels, governed by factors like:
- Nature Of Business Model: RBF can be particularly suitable for businesses in SaaS or capital-intensive sectors like robotics. It aligns with their needs when seeking customer payment flexibility and upfront cash from recurring revenue. In contrast, businesses with larger companies and larger contracts lean towards TBF.
- Balance Sheet Implications: RBF creates a future revenue commitment, tying a liability to sales performance. In contrast, TBF boosts liquidity by trading assets for cash without new liabilities or equity dilution.
This liquidity-boosting feature of TBF gains particular importance for public companies. Many stock exchanges in the U.S. and internationally mandate quarterly cash flow statements and proof of adequate liquidity. TBF enables these companies to meet such regulatory requirements swiftly without incurring debt or giving away ownership.
- Flexibility In Repayment: RBF offers flexibility tied to revenue performance, which can benefit an uncertain economy. With TBF, payments are timed with customer contracts, offering up to 80% of ARR for businesses and often no repayments for up to 12 months.
- Stakeholders’ Perception: How stakeholders perceive a financing choice matters, especially in industries where reputation is key. Frequent use of TBF could signal liquidity issues, risking stakeholder trust. Entrepreneurs must balance this against fast cash benefits.
Similarly, selling future cash flows must not strain daily operations or working capital.
The choice between RBF and TBF should be rooted in deeply understanding a business's current needs and future goals.
Pitfalls And Solutions In Alternative Financing
In the tech and SaaS landscape, the alternative financing market offers both promise and complexity. RBF is ideal for high-growth firms but can make cash flow a balancing act, along with varying credit risks.
TBF, on the flip side, delivers quick liquidity but comes with caveats like asset undervaluation and IP regulatory hurdles. Use it frequently, and it may spook investors and partners, questioning the firm's financial stability.
Decision-makers often rely on detailed market research to weigh RBF against TBF, and understanding contract specifics like revenue splits and caps is crucial.
For startups and SaaS companies, a carefully devised repayment plan can be a lifesaver, keeping financial health in check.
Alternative financing isn't a one-size-fits-all fix but a nuanced tool requiring strategic oversight, especially in the tech and SaaS arenas.
Turn Your Revenue Into Growth With Ratio Trade
Venture funding is no longer as reliable as it once was. With a 48% year-over-year drop in Q2 funding, SaaS and tech companies are turning to smarter, faster ways to secure capital—without taking on debt or giving up equity.
Your contracts are valuable, but waiting months or years for revenue can hold you back from pursuing growth opportunities. Ratio Trade changes that. It lets you convert those contracts into upfront cash—quickly and seamlessly—so you can focus on scaling your business.
Here’s why SaaS leaders choose Ratio Trade:
- Fast Access to Cash: Turn your recurring revenue contracts into immediate funding in just days.
- Full Ownership: No equity dilution, no restrictive covenants—what’s yours stays yours.
- Flexible Repayments: No payments for up to 12 months; Ratio gets paid only when your customers pay.
- Strategic Growth: Use the capital to expand your team, launch new products, or invest in your business’s future.
Just ask Nextech3D.ai—a fast-growing tech company that needed capital to fuel its expansion. By choosing Ratio Trade, they unlocked $2 million in upfront cash by monetizing future invoices and contracts.
With $411 million in available capital, Ratio Trade simplifies funding and helps SaaS companies stay agile, grow faster, and maintain full control of their business.
Curious about how much cash you can unlock? Try our contracts-to-cash simulator to get a quick idea!
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