launching a business it’s hard enough, but scaling it to a successful, profitable exit is even harder. Securing early-stage venture finance is often the best way to accelerate and sustain growth, but with multiple funding options available, how do you figure out the best course of action? What is the best alternative to VC and at what point in your company’s growth do other funding sources make sense?
Choosing the right funding partner can be tedious as they need to be aligned with your mission, values and goals. Otherwise, you get stuck in a relationship that doesn’t align with your goals and can lead to you ending up with less than expected ownership.
Here’s a rundown of how alternative finance came about, how it can benefit high-growth SaaS startups, and how to know if it’s right for you.
The evolution of alternative financing
There is a dearth of undiluted financing options for growth-stage businesses and recurring revenues. We found that traditional sources of debt capital (such as banks) simply prefer to provide debt to asset-heavy companies where collateral can be guaranteed.
Every dollar dormant in a savings account or any traditional short-term/liquid debt instrument is vulnerable to a real loss of value as inflation soars.
When it comes to SaaS or soft asset business models, there is simply no asset base to back up, which makes traditional debt providers uncomfortable. Also, while recurring or subscription revenue business models are not technically new, they are undersupported. SaaS companies can often only turn to traditional banks for financing after obtaining profitability and/or receiving institutional venture capital support.
This rules-based approach is pragmatic, but it results in a huge market gap for early-stage companies that have achieved product-to-market fit and strong revenue traction. If they don’t fit the “checklist”, they are simply thrown onto the backlog until all boxes can be checked, regardless of the underlying pull.
Revenue funding allows founders to have more control over their decisions without compromising board seats. SaaS companies can especially benefit from this model as it increases the future revenue of customers who are already registered.
Revenue financing allows companies on a healthy growth trajectory to instantly access future cash flows from their customers’ monthly payments. Another benefit is that borrowers’ credit limits can be adjusted according to their expected monthly growth, allowing them to withdraw funds when they need it.