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

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. Traditional financing methods 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.

A definition of recurring revenue

Monthly and annual recurring revenue 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. 

Recurring revenue business models

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, subscription-based business models 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. 

Recurring revenue financing explained

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. Debt financing (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 collateral assets, 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. 

There are steps you can take to increase your chances of approval 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. 

Recurring revenue financing in action

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

Pave, 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

Builder.ai 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

Verma Farms 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.

Recurring revenue financing FAQs

What counts as recurring revenue?

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?

The annual recurring revenue formula 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.  

How do you forecast recurring revenue?

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.