Raising Capital And Optimizing Structure In The Subscription Economy

This article was originally published on Forbes. You can read the original version here.

Venture capital funding has dropped 53% year-over-year, and banks have tightened lending policies, increasing interest rates amid financial downturns and bank failures.

On top of this, customers are favoring subscription payments over upfront bulk payments, limiting company cash flow.

However, companies need to raise funds to spur growth. This article will explore the pros and cons of funding options and how to optimize capital structure.

Debt Financing

Debt financing is when a company borrows money, usually through loans or bonds, to be repaid with interest, but there is limited accessibility and sometimes limited usefulness.

There are two distinct forms of loans to consider. First, there are term loans, often a minimal amount accessible due to banking regulations and restrictive credit underwriting constraints. The SVB collapse and the impact of the interest rate environment on banks, primarily regional banks, has further tightened the availability of funds.

Second, venture debts come into play. These are usually offered to early-stage, high-growth companies that still need to demonstrate profitability. In addition, the trade-off here is potential dilution, as these loans are secured against a small stake in the company's shares.

Before deciding to raise capital via debt, companies need to ensure that they have a high ARR to cover repayments, and they must fully understand the constraints of the capital.

Pros And Cons Of Debt Financing

Debt financing allows companies to retain ownership and benefit from tax-deductible interest payments. However, it comes with challenges. Creditors, especially for tech startups, enforce strict underwriting standards, limiting fund accessibility. The cost of such financing is often high, sometimes necessitating an accompanying equity raise. Additionally, lenders' restrictive covenants can burden companies with rigorous reporting and usage constraints. 

The financial strain might also intensify with the issuance of warrants, which can dilute ownership when exercised, and significant origination fees for loan processing and legalities.

Equity Financing

In this case, companies and entrepreneurs raise capital by offering shares to investors (existing shareholders, the general public or private equity firms) or financial institutions.

Equity financing is excellent for companies and often necessary for growth companies that need capital more than the current revenue to fund future growth. But the cost of capital can be extremely high, especially for high-growth companies, compared to other sources of capital because:

Pros And Cons Of Equity Financing

Equity financing offers companies the chance to secure funds without incurring debt and typically provides more capital based on future revenue projections rather than current earnings. There's usually no interest involved, as investors expect returns from future stock monetization, and businesses often enjoy flexibility with few restrictions on the funds' use.

However, there are downsides. Equity financing is the most dilutive means of raising capital, potentially reducing original shareholders' ownership percentage. If the raised capital significantly exceeds the company's revenue and growth projections fall short, there's a heightened risk of bankruptcy. Furthermore, securing equity financing can be time-consuming and may not be apt for every company or situation.

Non-Dilutive Revenue-Based Financing (RBF)

In this case, a company sells a percentage of existing customer contracts to a third party at a discount.

Non-dilutive revenue-based financing (RBF) allows businesses to secure funds quickly without diluting ownership, often within days. It ensures companies maintain strategic control and avoids restrictive covenants, potentially offering a lower cost of capital in specific cases. However, it's limited to companies with existing revenue. Additionally, the funds acquired through RBF, usually less than 30% of a company's annual recurring revenue (ARR), might not fully support ambitious growth plans.

Non-Dilutive True Sale Based Financing (TBF)

This has close similarities with non-dilutive RBF. But for true sale-based financing (TBF), a company transfers the risk of individual contracts (multiyear or annual contracts or term contracts) and other short-term accounts receivable and the associated nonpayment risk on its balance sheet in exchange for liquid cash.

TBF offers businesses flexible payback terms aligned with customer contracts. It's not categorized as a loan, so it won't appear as a balance sheet liability. Payments are timed with customer contract schedules, and businesses can tap into up to 80% of their ARR. There are no upfront fees or restrictive covenants, and it's non-dilutive.

However, it's limited to post-revenue companies with established customer contracts. The cost of financing varies with each contract's term and nonpayment risk, which can be higher for longer-duration contracts with annual payments.

Despite their promise, non-dilutive options like RBF and TBF can be complex to navigate—let’s talk about how Ratio Trade simplifies the process.

Optimize Your Capital Structure With Ratio Trade

Raising capital doesn’t have to mean giving up ownership or drowning in debt. In the subscription economy, non-dilutive options like RBF and TBF are rewriting the rules. Ratio Trade makes it even simpler.

Here’s how it works: Instead of waiting months—or even years—for customer payments, Ratio converts your contracts into upfront cash in just days. You get paid now, and Ratio only gets paid when your customers pay their subscriptions. No equity dilution. No rigid terms. Just fast, flexible funding that grows with your business.

Take Nextech3D.ai, for example. Facing a cash crunch but determined to scale, they partnered with Ratio Trade. By monetizing their future contracts, they unlocked $2 million upfront—fueling expansion without giving up equity or piling on debt.

With Ratio Trade, you can:

• Turn contracts into cash in just days—up to 80% of your ARR.
• No equity dilution, no restrictive covenants—what’s yours stays yours.
• Pay nothing upfront; Ratio gets paid when your customers pay.
• Use the capital to hire, launch products, or expand operations without missing opportunities.

Your recurring revenue holds the key to your next phase of growth. Try our contracts-to-cash simulator to see how much cash Ratio can provide based on your annual or multi-year contracts.