SaaS companies facing high burn rates and limited working capital should aim to target a 12- to 18-month runway to effectively manage their accelerated cash consumption.
To maintain financial stability, businesses often turn to traditional funding options such as venture capital or loans, which can be fiercely competitive and come with strings attached.
What if you could unlock the necessary working capital within your company’s current assets and operations?
In this blog, we explore three untapped sources of working capital: True Sale Based Financing (TBF), Customer-Financed Growth, and SaaS R&D Tax Credit.
True Sale Based Financing (TBF): The Untouched Gem
True Sale Based Financing has become an attractive choice for raising instant capital without diluting equity or harming the company’s balance sheet. This is especially appealing to CFOs in the SaaS industry.
At its core, this financing model involves the transfer of ownership of a company’s valuable assets—from intellectual property to contracts—in exchange for quick capital.
Pros of TBF
- Access quick cash for growth, scaling, and innovation.
- Replace illiquid assets with instant cash.
- Maintain current financial status with no new liabilities.
- Protect ownership stakes without dilution.
- Set terms without repayment until contract fulfillment.
Cons of TBF
- Selecting assets can take time and may slow future company growth.
- Determining the fair valuation of an asset can be challenging.
- One or more fewer assets on the balance sheet after the transfer is complete.
Customer-Financed Growth
Customer-financed growth, or 'customer-funded growth,’ leverages the company's existing customer base to fund its operations and growth through net working capital alone. This means no external investments or loans from financial institutions are needed.
In "The Customer-Funded Business," Dr. Mullins highlights five innovative methods that today's entrepreneurs have adeptly tailored.
- Matchmaker Models: This model connects buyers with sellers and earns a commission from every deal made. Capital marketplaces in the finance sector are prime examples, linking borrowers with lenders and earning a fee from every successful transaction.
- Pay-in-Advance Models: Here, customers prepay for products or services, often bagging discounts in the process. It's common in the SaaS industry where businesses offer annual subscriptions paid upfront, sometimes with up to 15% off. While this gives customers savings, it offers businesses a capital injection.
- Subscription Models: While this billing approach is a staple in the SaaS world, it's branching into areas like Robotics. But not every customer fits the one-size mold. Products like Ratio Boost allow SaaS vendors to provide flexibility at the point-of-sale, letting customers tailor their subscriptions.
- Scarcity Models: By limiting availability, demand, and value surge. It's why many SaaS companies offer special Black Friday subscription deals, even if it means a slight dip in profits. But with tools like Ratio Boost (flexible BNPL), SaaS vendors can close more deals without slashing prices.
- Service-to-Product Models: This transforms services into purchasable products. Once, companies would hire consultants to gauge their IT application's performance. Now, these services have morphed into real-time performance monitoring products, generating extra revenue for the business.
Pros of Customer-Financed Growth
- Focus better on customer satisfaction and retention.
- Leverage a stable and predictable revenue stream, reducing the need for external funds.
- Eliminate the burden of acquiring debt.
- Retain complete equity and control, free from external investor influence.
Cons of Customer-Financed Growth
- Restricting growth due to limited resources and commitments.
- Limiting growth potential by focusing too heavily on specific customers.
- Challenging to remain competitive in markets that require significant cash flow.
- Endangering stability if client demand drops or the customer base isn't large enough to sustain growth.
Also Read: 5 Things to Look for in an Ideal Subscription-Based Financing Partner
SaaS R&D Tax Credit
SaaS companies eyeing innovation can leverage the Federal R&D Tax Credit, offering up to 13% credit for qualifying new product and process developments. R&D drives technological advancement, enhancing user experience and giving SaaS businesses a competitive edge while improving the company's financial health.
While R&D spending varies, from 2% to a notable 117% of revenue, it's a flexible, essential cost ensuring sustained innovation leadership. To capitalize, firms must meet the government's specific R&D criteria.
Qualification Criteria
To qualify for credit, businesses must meet all four components of the test listed below.
- Purpose: Enhance products, processes, software, patents, or inventions for improved quality.
- Eliminate Uncertainty: Resolve design, development, or component uncertainties.
- Experimentation: Include experimental processes, testing, evaluating alternatives, and systematic trial and error.
- Technology: Rooted in computer science, engineering, chemistry, biology, or physics.
Additionally, claiming the SaaS R&D tax credit requires careful documentation, compliance with tax regulations, etc. It’s advisable to take professional assistance to navigate the complexities of the process.
Pros of SaaS R&D Tax Credit
- Significantly reduces tax liabilities for SaaS companies, freeing up capital for growth.
- Encourages investment in R&D, fostering technological progress and market competitiveness.
Cons of SaaS R&D Tax Credit
- Demands meticulous documentation due to its time-intensive and intricate process.
- Invites potential audits and penalties with any inaccuracies.
- Restricts its benefits with a narrow scope of qualified expenses.
- Favors larger, profitable firms over startups with minimal taxable income.
Upon analyzing three untapped sources of working capital for effectively managing finances, TBF emerges as the top choice for thriving SaaS businesses boasting recurring revenue contracts. Partnering with the right TBF provider can further streamline the working capital acquisition process for SaaS entrepreneurs.
Ratio Trade - Your Reliable TBF Partner
While there are multiple TBF providers out there, Ratio Trade stands apart for several key reasons:
- Swift Approval: Receive approval within 48 hours and access the capital in a few days.
- User-Friendly Application: Ratio's intuitive interface makes applying for TBF a straightforward process.
- Funding Proportions: You can access up to 80% of your Annual Recurring Revenue (ARR).
- Financial Capacity: Ratio has a substantial $400M fund to support SaaS and tech businesses.
Curious to learn more about acquiring working capital via Ratio Trade? Consider scheduling a demo now!
