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In today's dynamic business landscape, strategic expansion plays a vital role in ensuring the long-term success and survival of small businesses. However, achieving growth is no easy feat, and expanding a business doesn’t come without financial and operational challenges.

But don’t worry, achieving growth is well within your reach. With the right strategy and approach, you can level up your business and fund its expansion. One of the most common ways to finance your expansion efforts is through a 

. Most, if not all, small businesses get to that point where a small business loan becomes a necessity.

In this article, we’ll explore how small businesses can leverage loans to fuel their growth and provide insights you’d need to know before embarking on the loan application process.

What if sales are not declining, customers aren’t unhappy, but you’re not necessarily expanding or growing as a business? Should you be worried? Unfortunately, the answer may be yes.

It’s not enough to have things running smoothly without any real growth in your 

. To survive and thrive, a business needs to evolve to meet the changing needs of its customers and the industry landscape. When a business stops growing, it often starts dying, because customers eventually move on and the market changes. If you don’t change with it, you get left behind. Expanding your business opens doors to new possibilities, allowing you to capitalize on fresh opportunities, boost your revenue, and 

 can be an exciting prospect, filled with opportunities for growth and increased profitability. However, expansion shouldn’t be pursued for it’s own sake, but as a strategic move that aligns with your business's objectives and market conditions. By carefully assessing the need for expansion, you can make informed decisions and lay a strong foundation for success.

Approaching business expansion with a balance of enthusiasm and prudence is key. Before diving into the 

, take a moment to explore a few questions:

Answering these questions will help you evaluate the viability and potential risks associated with expanding your operations and ensure your business is well-prepared to seize new opportunities, increase revenue, and enhance profitability.

Factors to consider before expanding your small business

Every strategic business move requires planning and careful consideration of the factors involved. Understanding these factors will not only ensure the success of your expansion but also safeguard your business's financial stability and long-term viability. Here are four key factors you should consider before taking the leap into expansion.

Before applying for a loan, it's important to conduct a thorough market analysis to find viable growth opportunities that align with your business goals. This includes assessing market demand, competition, and feasibility.

For example, when considering opening a new location, evaluate whether the market can support another branch. Is there a growing customer base or potential for new customers in your target market? Would a new location cannibalize customers from your current location, or would it tap a completely new customer base? Expansion should be driven by a clear demand for your offerings to ensure a sustainable and profitable venture.

 is an essential step to understanding the demand for your product or service in new markets and evaluating the competition. Consider factors such as target demographics, purchasing behavior, and any unique challenges or trends within the industry. This analysis will enable you to assess the potential demand for your offering in new markets and determine if the growth opportunity is worth pursuing.

Approaching market analysis with an informed and optimistic mindset allows you to identify untapped possibilities, make strategic decisions that contribute to your business's long-term success, and position your small business for sustainable growth.

 before pursuing expansion through borrowing. Taking on additional debt without a clear understanding of your ability to repay can have detrimental consequences. 

, credit score, and debt-to-income ratio. Understanding these financial metrics will give you insight into your business's borrowing capacity and its ability to handle additional debt obligations.

Evaluate your current expenses and revenue to gain a comprehensive view of your financial position. This analysis will help you determine the amount of funding required for expansion and whether your business can comfortably manage the loan payments. Ensure that your business has a strong financial foundation to support the costs and risks associated with expansion.

If your business is currently facing financial challenges, it may be prudent to focus on improving its financial health before pursuing expansion. Consider implementing strategies to enhance cash flow, reduce debt, and optimize profitability. By addressing these foundational aspects, you can position your business for long-term success and create a solid financial foundation for future growth.

Assess your operational capacity to handle expansion. Do you have the necessary resources, infrastructure, and systems in place to manage increased production, sales, or service delivery? Identify any gaps or limitations that may hinder your ability to scale effectively.

Evaluate your workforce and their skill sets. Determine if you have the necessary talent and expertise to handle increased demands during the expansion. If not, consider options such as hiring additional staff or providing training to bridge any skill gaps.

 and vendor relationships. Ensure you have reliable suppliers who can meet increased demand and negotiate favorable terms to support your expansion plans. By conducting a comprehensive evaluation of your operational capacity and resources, you can identify areas that require attention and make strategic decisions to ensure a successful expansion.

Do you have a defined plan that goes beyond getting a loan and pumping it into the business? A sound growth strategy is essential for the success of your business expansion. Draw up and establish specific and measurable targets that align with your long-term vision. This will serve as a guide, identifying where and how to spend your funds.

Identify your target market and refine your marketing strategy. Understand your customers' needs, preferences, and behaviors to effectively position your business and attract new customers.

Develop a detailed implementation plan. Break down the expansion process into actionable steps, assigning responsibilities and setting timelines. This will help ensure a smooth and organized transition.

Monitor and track key performance indicators (KPIs) to measure the success of your expansion efforts. By developing a robust growth strategy, you set the stage for a well-planned and purposeful expansion. It allows you to approach the journey with confidence, knowledge, and enthusiasm, ensuring that your small business flourishes in the face of new opportunities. Not only will this give 

a clear path to follow, but it will also give lenders confidence that you have a solid plan in place to use the funds effectively.

Preparing your business for a successful loan application

Applying for a loan can indeed seem daunting, but proper preparation can significantly increase your chances of success. Here are additional tips to help you prepare your business for a loan application:

1. Developing a comprehensive and convincing business plan

A solid and well-crafted business plan serves as the foundation for any successful loan application. Your business plan should go beyond outlining your growth strategy; it should also provide a clear and concise snapshot of your business's current state. This includes valuable information about your target market, competitive analysis, and financial projections.

When creating your business plan, it's important to remember that lenders want to see a well-thought-out plan that demonstrates how you will use the loan funds to grow your business. Clearly articulate how the loan will contribute to your expansion plans, whether to fund new equipment, hire additional staff, or penetrate new markets.

Your credit score is one of the most critical factors lenders consider when reviewing loan applications. If your business's credit score needs improvement, take proactive steps to boost it before applying for a loan, including doing the following:

Improving your creditworthiness not only improves your chances of loan approval but also helps secure more favorable loan terms, such as lower interest rates and higher borrowing limits.

Lenders will require a range of financial documents to assess the financial health and viability of your business. Gather and organize these documents in advance to streamline the loan application process. Typical financial documents include:

To ensure that your financial statements are organized and accurate, it's a good idea to work with a professional accountant or bookkeeper. They can help you prepare and present your financial information in a  clear, up-to-date way that supports your loan application.

4. Determining the optimal loan amount needed

Before submitting a loan application, you need to know exactly how much capital you need to fund your expansion plans. This involves accounting for all expenses associated with your growth strategy, including equipment costs, marketing expenses, operational expenditures, and any other relevant financial commitments.

By calculating the loan amount needed in advance, you can avoid the risk of borrowing too little or too much and ensure that you have the necessary funds to achieve your business goals. Striking the right balance ensures that you have the necessary funds to effectively execute your business goals while maintaining financial stability.

increase your chances of success when applying for a loan

. Remember, lenders are more likely to respond favorably to loan applications that come from well-prepared and financially stable businesses. By presenting a clear and compelling case in all the above mentioned, you increase your chances of securing the funding necessary to propel your business forward.

Managing loan repayments and monitoring business performance

Congratulations on securing the loan! However, your long-term success extends beyond just obtaining the loan. Effectively managing loan repayments and closely monitoring your business's performance is what truly creates a solid foundation for sustainable growth.

Monitor your cash inflows and outflows diligently, ensuring that you have sufficient funds available to meet your loan obligations. Implement sound cash flow forecasting techniques to anticipate potential shortfalls and take proactive measures to mitigate them. Make sure you plan for the cash flow impact of your expansion by weighing the cash outflow of loan payments against the extra cash inflow of your expansion. If you borrow to expand in a way that won’t boost your cash flow, you could be putting yourself in a bind, so be aware.

2. Implementing budgeting and expense control

Develop a detailed budget encompassing all aspects of your business operations, including loan repayment as a core expense. Your budget should outline anticipated revenues, fixed and variable costs, and other financial obligations.

Regularly reviewing and analyzing your budget to identify areas where cost-saving measures can be implemented will help you control your expenses.

Regularly analyze your business's financial performance to gain insights and track its overall health. Monitor key financial indicators such as revenue growth, profit margins, and debt-to-income ratio. By regularly assessing your financial data, you can identify areas for improvement, make informed decisions, and take necessary actions to ensure financial stability.

4. Monitoring key performance indicators (KPIs)

Define and monitor relevant KPIs that align with your business goals and loan repayment obligations. These KPIs could include metrics like customer retention rates, conversion rates, or inventory turnover.

By tracking KPIs, you gain valuable insights into the effectiveness of your business operations, identify areas of optimization, and make data-driven decisions to maximize your performance and meet your loan repayment obligations.

It's crucial to develop contingency plans to mitigate potential risks and challenges that could impact your ability to make loan repayments. Consider scenarios such as economic downturns, regulatory changes, or unexpected market fluctuations.

By proactively planning for contingencies, you can minimize disruptions, adapt to changing circumstances, and maintain consistent loan repayments, ensuring the financial stability of your business.

6. Maintaining open communication with the lender

Foster a transparent and open line of communication with your lender throughout the loan repayment period.

If you encounter financial difficulties or anticipate challenges in meeting repayments, let your lender know right away. They may be able to provide guidance, offer alternative repayment options, or work with you to find a suitable solution.

Keeping your lender informed shows your commitment to fulfilling your obligations and helps build a strong working relationship based on trust and mutual understanding.

Expanding your small business can be a challenging but rewarding experience. By following the steps outlined in this article, you increase your chances of obtaining a loan and ensure it’s used effectively to achieve your expansion goals. Plan appropriately and choose the right loan that meets your business’s needs. 

Achieving growth is no easy feat, and expanding a business doesn’t come without financial and operational challenges.

See how you can use small business loans to grow your company, how to decide if you're ready to expand, and how to get approved for a loan and manage repayment.

How small business loans can help you grow your business

How to utilize business loans for expansion

How to Utilize Business Loans for Expansion

Josh Richards

Entrepreneurs and business owners may be some of the hardest-working people you’ll ever meet, but sadly, no amount of hard work can keep a business healthy if the economics are wrong. We’re not talking about the big-picture macroeconomic environment, but the 

You need to keep a close eye on your financial metrics to ensure each product line pulls its weight and every sale adds to your success, but which metrics should you use? 

Margin is the fraction of revenue left after certain expenses, but there are different ways of measuring it.

Gross margin and contribution margin are both powerful options, each helping you understand your business in a different way. Gross margin shows you the percentage margin left over in your business as a whole after direct costs have been removed. Contribution margin shows you the dollar amount each individual unit contributes to your fixed costs and 

 after accounting for variable costs for that unit.

Here’s a quick side-by-side comparison, and then we’ll take a closer look at what these metrics mean, how to use them, and how both are calculated (or 

jump down to our Gross margin calculator or Contribution margin calculator 

Gross margin is a financial metric that shows how much money a company has left over after it pays for the direct costs of producing its goods or services. In other words, it's the difference between a company's revenue and the cost of the materials, labor, and other expenses that are directly tied to making its products or delivering its services.

For example, let's say a bakery sells $1,000 worth of cakes in a month. The bakery's direct costs of making those cakes, including ingredients and labor, total $500. The gross margin for the bakery would be $500 (more commonly expressed as a 50% margin), which is the revenue of $1,000 minus the direct costs of $500. This means that the bakery has $500 left over to pay for its overhead expenses, like rent, utilities, and marketing.

Gross margin is an important metric for businesses because it helps them understand how efficiently they produce and sell their products or services. By tracking gross margin over time, companies can make strategic decisions to optimize their operations and increase profitability.

Revenue - Cost of goods sold (also called COGS) = Gross margin

You can see that the formula itself is pretty simple, so let’s dig into the different elements to make sure you start with the right numbers; then, we’ll take a look at how you can use gross margin to improve the profitability and sustainability of your business. 

Revenue is a pretty straightforward metric, but there are a couple of options when it comes to the gross margin formula. Gross margin can be calculated using either gross revenue or net sales. Gross revenue is the total revenue brought in from sales activity, while net sales is basically gross revenue minus (or 

Using net sales to calculate gross margin will paint a more accurate picture, as your typical discounts, returns, and allowances should be kept in mind when thinking about your margins and profitability. For 

 and retailers who have high returns, or SaaS companies offering annual discounts, these numbers can be the difference between profits and losses. You need to be aware so you can price accordingly. 

That said, if your company has very little in the way of discounting or returns, or you’re running a quick calculation and don’t have all that information in front of you, gross revenue could be a reasonable stand-in. 

Cost of goods sold is exactly what it sounds like. It represents the total cost of producing and delivering goods to customers, including the direct cost of materials, labor, and manufacturing overheads. COGS is typically measured over a specific period, such as a month, quarter, or year, which will match the revenue period you use.

To calculate COGS, you need to factor in all the direct costs incurred during the production process, including raw materials, direct labor, and manufacturing overheads like rent and utilities. It's important to note that only costs that are directly attributable to the production process should be included in COGS. Other expenses, such as marketing and administrative costs, are not included in COGS as they are not directly related to the production process. 

While these numbers make sense for companies that sell a product, what about SaaS and service businesses? When you sell a service, you need to factor in the direct labor costs involved in delivering that service, including wages and salaries of the employees who perform the service, as well as any sales commissions paid to reps who bring in new customers. 

Software licenses and hosting costs are another direct cost of delivering a SaaS service. By including these costs in their COGS calculations, SaaS and service businesses can get a more accurate picture of the true cost of delivering their services and make more informed decisions about pricing and profitability.

Just a quick note on two terms you may hear used interchangeably. Gross margin, as we calculated above, is the amount left over after COGS are subtracted from revenue. The gross margin ratio is the percentage of each dollar retained as gross profit, which is calculated by dividing the gross margin by revenue. Using the example above, our bakery had $1000 in revenue and $500 in COGS, leaving a $500 gross margin. We divide that $500 by $1000 to arrive at the gross margin ratio of 50% (after multiplying by 100 to get a whole number percentage)

Gross margin is a very important metric to help entrepreneurs and operators understand their business in several ways. Gross margin gives you:

Gross margin is the foundation of a good bottom line. In order for a business to bring home a solid profit, there needs to be plenty of cushion between COGS and sales so that indirect costs (like rent, utilities, and marketing) can be covered. Monitoring gross margin regularly can help businesses identify areas where they can reduce costs or increase prices to boost profitability. Depending on the granularity of your cost data, you may also be able to track margin for individual product lines, giving you a clearer picture of which products contribute most to overall profitability and which ones may be holding you back. 

In addition to providing insight into profitability, the gross margin also plays a vital role in pricing decisions. When setting prices for products or services, businesses need to consider not only the costs of production but also the profit margin they want to achieve. By analyzing the gross margin, companies can determine whether their prices are too high or too low and adjust accordingly. For example, if a company's gross margin is lower than the industry average, it may need to raise prices to improve profitability.

Gross margin can also help you with cost control. By keeping track of COGS, businesses can identify areas where they may be overspending and take steps to reduce costs. For example, if a company's gross margin has declined over time, it may need to renegotiate supplier contracts or find ways to streamline production processes. By focusing on cost control, businesses can improve their gross margin and increase their profitability over the long term.

Contribution margin is a key financial metric that enables businesses to determine the profitability of their products or services. This metric represents the difference between the sales revenue generated by a product or service and the variable costs incurred directly to produce or deliver it. These variable costs may include raw materials, labor costs, and shipping expenses, among others.

Let's say a software company sells a subscription-based service for $1,000 per year. The variable costs involved in delivering this service, such as server expenses and customer support costs, total $200 per subscription. In this scenario, the contribution margin for each subscription would be $800, which is the revenue of $1,000 minus the variable costs of $200. This means that the company has $800 left to pay for fixed expenses like salaries, rent, and utilities.

By analyzing the contribution margin for different offerings, businesses can identify the most profitable products or services and allocate resources accordingly. For instance, if the contribution margin of a particular product is relatively low, the business may decide to discontinue that product or optimize it to increase profitability. Overall, contribution margin enables businesses to make informed decisions and optimize their operations to boost profitability.

Revenue - Variable costs = Contribution margin

As you can see, the formula is similar to the gross margin formula, with the difference being  variable costs replacing COGS. Let’s look at variable costs and why they matter for this calculation.

One key aspect of COGS is direct vs. indirect costs. Only those directly related to producing and delivering the product or service are included in the COGS number. Now we’re taking a look at variable vs. fixed costs. The difference here is that variable cost changes with each additional unit produced. In the first example of a bakery, the ingredients would increase for each additional cake baked. The baker's salary, however, would remain fixed regardless of the number of cakes (as long you don’t reach a volume that requires hiring an additional baker). 

That brings us to the other key difference between these two metrics. Gross margin is typically measured as a percentage of the entire company or line. Contribution margin is measured for each individual unit and is often expressed as a dollar amount. So if one SaaS subscription sells for $1000 with $200 in variable costs, the contribution margin per subscription would be $800. As the name suggests, $800 per unit 

 to fixed overhead costs, and once those are covered, it contributes to profits. 

As you’re thinking about fixed and variable costs, you may think of examples that are mixed, or partially variable. An example could be direct labor. It doesn’t cost you any more for your employees to make an extra unit, but at some point (maybe every 6,000 units produced per month) you’ll need to add one more salaried employee to your production line. You can include those costs in your variable costs on a per-unit basis. 

Contribution margin is a very helpful tool for understanding your unit economics and how each sale impacts your business. Contribution margin can:

This is the key function of contribution margin. By calculating how much each unit contributes, you can determine exactly how many units you need to sell in order to cover your operating costs and break even. With that information, you can decide if the product or business is viable and create a plan to reach that break-even point. For example, if you sell a product for $80 with a variable cost of $30, you have a $50 contribution per unit. If your monthly fixed overhead costs are $10,000, you need to sell 200 units per month to break even. After that, your contribution margin will represent profit.

Understanding contribution margin can also inform how you view your 

 (CAC). When you know how much each individual sale contributes to your overhead and profits, you’ll have a better understanding of how much you can afford to spend to acquire a new customer. For instance, if it costs you $100 in ad spend to get a new customer, and the product you sell will have a $20 contribution margin, you’ll need to sell 5 units before you’ve covered your acquisition cost. If your customer isn’t likely to buy 5 units from you or buy additional products once they’ve become your customer, you’ll need to find a way to lower CAC or increase the value of orders. If you haven’t already, make sure you 

 so you can make informed decisions here.

It also allows you to compare the unit economics of each product to see which are contributing the most to your business and which may be barely breaking even or possibly even losing you money. 

Like gross margin, contribution margin gives you another way of looking at profitability.  This metric makes it easy to see how sales volume will impact profitability and how much your expenses will fluctuate with the increased sales. 

How to use the gross margin & contribution margin calculator

As we just saw, gross margin and contribution margin are similar but different. By using direct costs, gross margin reveals the gross profit percentage of the company as an overall measure of health and allows you to track progress and compare against industry benchmarks. By focusing on variable costs, contribution margin shows how much each individual unit contributes toward fixed costs and profits, and how sales volume impacts profitability.   

One thing both numbers have in common is that they can both be easily calculated using our free calculator below. Simply input the numbers for your business, and you’ll see your results instantly

—no need to log in or go to another page. 

Gross margin and contribution margin both give you a clearer picture of profitability in your business in different ways, overall and on a per-unit basis. You can use both of these metrics to make better decisions and grow your business in a healthy, sustainable way. 

Want to learn more about gross margin and contribution margin? Here are some commonly asked questions about these metrics:

How do I find contribution margin per unit?

Contribution margin is typically expressed on a per-unit basis, but you may not have easy access to the right numbers. If you don’t have per-unit costs available at your fingertips, don’t worry. If you’re wondering how to find contribution margin per unit, first calculate the margin based on net sales and variable costs for a period of time (a month, for example), then divide by the number of units sold to get a per-unit dollar amount. 

What is the contribution margin per unit formula?

The standard formula for calculating contribution margin is:

Whether this is per unit or overall for a certain product depends on the revenue and cost numbers you use, but it's typically measured per unit and expressed as a dollar amount rather than a percentage.

How do I calculate contribution margin ratio?

In some cases, you may want to see the contribution margin ratio rather than the raw dollar amount per unit. To calculate it, you need to subtract the variable costs from the revenue and divide that number by the revenue.

What’s the difference between gross margin vs EBITDA?

Gross margin represents the percentage of revenue that a company retains after deducting the cost of goods sold, while 

 stands for earnings before interest, taxes, depreciation, and amortization, and represents a company's operating profitability. 

While both metrics can help evaluate a company's profitability, they differ in their scope and focus. Gross margin is a measure of the efficiency of a company's production process and its ability to manage costs, while EBITDA focuses on a company's operating performance and its ability to generate profits from its core business operations. Ultimately, the choice between these two metrics depends on the nature of your business and what you’re trying to measure.

What’s the difference between gross margin vs operating margin?

Gross margin represents the percentage of revenue that remains after subtracting the cost of goods sold, while operating margin is the percentage of revenue that remains after subtracting all operating expenses, including the cost of goods sold, salaries, rent, and other expenses. 

While both metrics are used to evaluate a company's profitability, gross margin is focused solely on the cost of goods sold, while operating margin takes into account all operating expenses, even those that can’t be directly attributed to production. 

Operating margin provides a more comprehensive view of a company's profitability and efficiency in managing its costs. However, gross margin can be useful for companies with a high cost of goods sold relative to other operating expenses, such as manufacturing companies. 

What’s the difference between gross margin vs gross profit?

The terminology around gross margin can be confusing, especially when terms are used interchangeably (we’re even guilty of that in this blog post!) 

 is commonly used to refer to the raw dollar amount of margin between COGS and revenue, which is the same as gross margin. However, many people use the term gross margin (as we’ve used it above) to mean gross margin 

which is simply taking this raw dollar amount and dividing it by the revenue or net sales number to arrive at a percentage.

Yes, it is possible to measure gross margin per unit. To calculate the gross margin per unit, you would first determine the total cost of producing one unit of a product, including the cost of materials, labor, and any other expenses directly related to production. Then, you would subtract the cost per unit from the unit price to arrive at the gross margin per unit. It can be useful for pricing decisions, but, since gross margin doesn’t take into account variable costs vs fixed costs, it’s not as helpful as contribution margin for determining things like break-even point. 

Entrepreneurs and business owners may be some of the hardest-working people you’ll ever meet.

Get a better understanding of gross margin and contribution margin and use our free calculator to help you calculate these metrics in your own business.

Free gross margin and contribution margin calculator

Gross Margin vs contribution margin (with free simple calculators)

Gross Margin vs. Contribution Margin (with free simple calculators)

We're excited to share that Pipe has joined the Financial Technology Association (FTA). This partnership aims to revolutionize financial access for small-to-midsize businesses and entrepreneurs. These businesses form the backbone of our economy, and we believe that access to capital is vital for their growth and success.

Changing the financial services industry for the better with the FTA

At the heart of the FTA's mission is the idea of fintech for good, harnessing the power of financial technology to promote inclusion, competition, and responsibility. The FTA takes its role as a representative of industry leaders seriously, actively shaping the future of finance.

Aligned with our vision, the FTA aims to create a more inclusive and accessible financial system for everyone, making them the perfect partner for Pipe. As a company, our mission is to empower business owners to build and operate their companies on their own terms. We are proud to join forces with other like-minded companies, including Chime, Figure, Intuit, Plaid, Ribbit Capital, Stripe, and many more.

How Pipe works to create a more inclusive and equitable financing model

At Pipe, we have transformed the financing landscape by providing fast, frictionless, and non-dilutive capital to businesses across various industries. Whether it's SaaS, product subscriptions, retail, hospitality, or service-based businesses, we serve companies of all kinds.

Our transparent underwriting process levels the playing field for companies seeking capital. By assessing a company's secure and real-time financial data, Pipe offers unbiased access to capital based solely on their financial health and revenue.

Since launching three years ago, over 23,000 businesses have signed up to our platform. Pipe’s goal is to provide non-dilutive financing to businesses across a wide range of industries. 

Joining forces to continue the transformation into a fairer and more transparent financial system

Through our partnership with the FTA, we aim to drive the mission of fintech for good and spearhead the evolution of the financial services industry. Here are our clear goals:

As a proud member of the FTA, Pipe remains dedicated to transforming financial services for business owners. We are committed to creating a flexible, transparent, and accessible financial system that empowers all businesses to gain the financing they need to grow and thrive.

The FTA welcomes Pipe, the modern capital platform, to association. 

See how Pipe and the FTA are working to make capital more accessible, transparent, and fair for small business owners across industries.

Pipe joins FTA to promote FinTech for good

A new era of fintech collaboration: Pipe joins the Financial Technology Association

FTA Welcomes Pipe, the Modern Capital Platform, to Association  

Growing a business is a challenging task, but there are a few things that can make it more challenging than it needs to be. 

One of the biggest hurdles for entrepreneurs and CEOs looking to scale is a lack of access to capital. Without the cash in hand to make big growth moves, your business may have to settle for growing very slowly, as revenue gradually trickles in over time. 

 don’t always have a solution for this problem, as they may not be set up to service emerging business models. They can be too slow and cumbersome for business owners who need capital quickly. 

For companies with monthly or annual recurring revenue (MRR or ARR), faster growth is possible, with the right kind of financing. As these recurring revenue businesses become more and more common, recurring revenue financing has emerged to fill the capital gap. Let’s take a closer look at recurring revenue financing (or RRF) and how it can help you grow your business.

What is recurring revenue financing and how does it work?

Recurring revenue financing was built specifically for companies with MRR and ARR, to allow them to leverage the strength of their business model and avoid dilution. Let’s start with a clear definition of recurring revenue and recurring revenue business models.

 are a great way to build a stable, predictable business. MRR and ARR can be seen as the same concept, just measured over different time periods. Both are defined as the predictable portion of revenue that repeats each month or year. MRR is more commonly used, while ARR is common for companies with multi-year contracts or as a way to measure cumulative MRR for the entire year.

In years past, recurring revenue was limited to a few subscriptions (think things like newspapers and magazines) or payments on financing like a car or home payment. But recently, 

 have become the norm for everything from SaaS tools to car and bike subscriptions and streamlined services. 

SaaS and cloud-based companies kicked off this trend by turning both software and hardware into easy-to-use subscriptions, and the COVID-19 pandemic drove the subscriptionification of just about everything else as we all looked for convenient, no-contact ways to do business. Any business that operates with a subscription or contract with regular monthly, quarterly, or annual payments is leveraging a recurring revenue model, with the advantage of predictable revenue and decreased reliance on acquiring brand new customers each month. 

Traditional financing models are based on the old way of doing business. Equity financing (like venture capital and angel investments) is based on the equity of the company. Equity investors tend to invest in high-growth industries and companies in hopes that the value of the company will increase. 

 (like bank loans and venture debt) is based more on the cash flow of the company and tends to be available to more mature businesses whose cash flow can support the repayment schedule, and who also have substantial hard assets to offer up as collateral against the loan. 

Recurring revenue financing, on the other hand, relies on the power of the recurring revenue model. It treats recurring revenue as a new asset class, recognizing that these predictable revenue streams are a source of stability. RRF works by enabling companies to sell the rights to future revenues in exchange for up-front capital. It’s a stable, dilution-free financing solution for companies with MRR and ARR. Let’s take a closer look at these unique benefits.

The benefits of recurring revenue financing for businesses

By treating recurring revenue as an asset class, RRF has several benefits over traditional financing. 

Compared to equity, recurring revenue financing has the advantage of being completely non-dilutive. In other words, you don’t give up any of your ownership stake in the company in exchange for growth capital. This is a huge benefit if you’re in a fast-growing industry or company, where your equity may soon be worth much more than investors paid for it. It’s also an advantage in a slower growth industry, because equity investors may not be willing to invest if they don’t see large upside potential in your valuation. 

As we mentioned earlier, traditional lending is often tied to 

, which many recurring revenue businesses like SaaS don’t have much of. This can make traditional debt financing hard to get. The application process can also commonly take 6-8 weeks or longer (with equity rounds taking even longer). 

In contrast, recurring revenue financing is based on the predictability of your cash flow from MRR and ARR. You can access financing much faster, by verifying your recurring revenue through live data from your billing tools.

How to get started with recurring revenue financing 

Getting started with recurring revenue financing is simple and frictionless. Since it’s all based on live, connected data, there are no lengthy applications to fill out, no pitch decks to prepare, and no agonizing road show to win over investors. The health of your company speaks for itself. 

 and improve your terms by making sure your company is as healthy as possible. A healthy cash balance and runway reduce your risk profile and increase confidence that your business will continue generating recurring revenue for the predictable future. 

Accounting, for recurring revenue businesses, is crucial to securing financing. While your bank balance and incoming revenue may be healthy, your expenses will determine your burn rate and runway, which are a key part of your financial health and sustainability. Ensuring your books are up-to-date and accurate and that you’ve connected all of your data sources will allow you to get the best possible cost of capital for your recurring revenue financing.

Let’s take a look at how three recurring revenue businesses have grown quickly with recurring revenue financing: 

Pave got 7 figures of dilution-free capital to scale their business in just 48 hours

, a UK-based credit building app, had already raised equity rounds but wanted to keep scaling without further dilution. By leveraging recurring revenue financing, they were able to access 7 figures of capital to invest in marketing and scale faster without dilution. Not only did they have the funds to speed up growth, but they also had the focus because they didn’t need to pull themselves away from the business to raise another equity round. 

Flexible capital helped software developer Builder.ai grow their revenue 10x in 2 years

 helps companies create custom apps and they needed a better way to finance their rapid growth. Rather than take on loans or give away equity, they decided to leverage their recurring revenue. In addition to utilizing their existing recurring revenue, Builder used RRF to enable a payment plan, acquiring more customers faster, while still collecting the annual value of those payments up front through recurring revenue financing.

Verma Farms financed an acquisition in 72 hours

 is a luxury CBD brand offering D2C subscriptions to customers. They had a big opportunity to acquire CBD startup Penguin, but they only had 72 hours to secure the funds. They looked into loans and equity financing but didn’t have nearly enough time to complete either. Using RRF, they were able to trade subscription revenue for 7 figures of capital to complete the acquisition in time.

Businesses have always placed a high value on repeat customers. After all, when people come back, you don’t have to keep finding new customers. Recurring revenue is just a more structured form of repeat business. For example, if you have customers who buy from you about once per month, that would be re-occurring but not recurring revenue. There’s no guarantee they’ll be back each month. However, if they have a contract, subscription, or other structured setup to pay you monthly, that counts as recurring revenue because it’s guaranteed unless they cancel their subscription.

How do you calculate annual recurring revenue?

 is fairly simple. Just take new subscription revenue + existing subscription revenue  - churned subscriber revenue lost. You can use the same formula for annual recurring revenue or monthly recurring revenue, depending on how often your customers pay you.  

When you know your churn rates and new customer acquisition rates, you can also forecast annual recurring revenue for future periods. This can help you plan for future growth and budget for repayment on your financing.

Does recurring revenue make it easier to get financing?

Yes! Recurring revenue can often make it easier to get financing.

Growing a business is a challenging task, but there are a few things that can make it more challenging than it needs to be. 

Find out how Recurring Revenue Financing can give you access to dilution-free up-front capital without the restrictions of traditional financing 

What is Recurring Revenue Financing, and Can I Use It?

How you can use recurring revenue financing for faster growth without dilution

How You Can Use Recurring Revenue Financing for Faster Growth Without Dilution

Challenging times can shine a new light on our strengths. When the markets are uncertain, for instance, SaaS companies in many verticals are still models of staying power, with their carefully measured costs and services their customers often can’t do without. So when their options for financing narrow, how can they capitalize on their position to stay strong and continue to grow? Recurring revenue financing may have the answer.

By optimizing cash flow and extending runway, SaaS companies can position themselves to stay solid in an uncertain market.

Discover how SaaS companies can use recurring revenue financing and Pipe's trading platform to better manage cash flow, support operations, and fund growth in any market. 

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Pipe Blog

SubscribeGet the best of Pipe's Blog

Grow your Business

How to utilize business loans for expansion

Gross Margin vs contribution margin (with free simple calculators)

A new era of fintech collaboration: Pipe joins the Financial Technology Association

How you can use recurring revenue financing for faster growth without dilution

Financing growth, resilience, and the staying power of SaaS

How Pipe works for D2C subscription businesses

Is Pipe just for SaaS companies?

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SubscribeGet the best of Pipe's Blog