How subscription-based financing can help organisations raise instant growth capital

Consider the following scenario: A startup company with a great business idea is aiming to set up/expand its operations. With the help of family, friends and the founder's own financial resources, the company has continuously demonstrated expertise in its products and business approach, consistently walking along the path of success.

Over the years, the organisation expands its operations, goals, and customer base. After a short period, the company has risen through the ranks of its competitors to become highly valued, allowing for future expansion to include new geographies, product offerings, and possibly an IPO (Initial Public Offering).

If the simple beginnings of the hypothetical business described above appear unrealistic, it's because “they are” nearly too good to be true. Without a doubt, there are a small number of fortunate businesses that survive and grow in the manner depicted above, i.e., with little or no aid from external sources.

In reality, businesses go through their ups and downs. Clients churn, key employees leave mid-way, and then there is the high cost to acquire customers leading to negative cash flows.

Many such companies also opt for venture capital that gives them a large enough safety net which brings a peace of mind.

But to raise these funds, founders must go through several time-consuming processes that can take anywhere between three to six months (or sometimes even more). However, other methods of raising instant upfront capital, such as a subscription-based financing model under non-dilutive funding, are gaining traction.

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How does subscription-based financing help?

Additional innovative funding options for firms, particularly startups, have emerged in recent years in addition to traditional equity and venture capital financing. Since the majority of companies (~95 percent plus) are deemed unsuitable for venture capital, these new alternative financing options have given founders more options for limiting dilution, extending the runway to meet a value target/milestone, or simply bootstrapping a profitable business.

An interesting model, SBF (subscription-based financing) has emerged as an appealing alternative source of raising capital over time. Subscription-based financing allows recurring revenue companies to raise funds without diluting their equity by trading subscription revenue for upfront capital instantly.

For an investor, the predictable cash flows and maturity of the recurring revenues makes it similar to a fixed income-yielding asset profile. It's ideal for SaaS and other subscription-based businesses that need money for expansion and customer acquisition.

Founders aren't even required to give away any of their company (equity or proprietorship) that they have worked so hard to develop from the beginning.

How it works

Subscription-based financing has a very straightforward procedure that begins with registering on trading platforms that provide such alternative financing options. Founders can then link their accounting and invoicing management software, and within 48 hours of the data being synced, the platform unlocks the trading limit.

Companies can then trade contracts to raise funds with the push of a button. All subsequent transactions take place in real-time. The trade limit (the amount of money a company can raise) increases as it grows.

Simply said, trading recurring revenues is one of the most founder-friendly ways of raising capital as it assists the company in balancing its capital stack and ensuring that it has not diluted too much equity or taken on too much debt. Such non-dilutive funding methods do not impose any financial or operational covenants, ensuring that the company retains its control and maintains its growth.

The bottom line

To create an efficient capital stack is an art which should be given extreme importance for a company at every stage.

It allows you to make your business grow at much more favourable terms in a shorter amount of time. Founders can choose to dilute lesser equity, take on less debt, and minimise risk while maximising returns by utilising the actual potential of trading recurring income.