Starting a business is hard enough, but scaling up to a successful and lucrative exit is even harder. Securing early stage venture financing is usually the best way to accelerate and sustain growth, but with the variety of financing 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 business growth do other sources of funding make sense?
Choosing the right financing partner can be tedious, as it must align with your mission, values and objectives. Otherwise, you’ll get stuck in a relationship that’s not aligned with your goals and may end up taking less ownership than expected.
Here’s an overview of how alternative financing 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 lack of non-dilutive financing options for growth-stage recurring revenue businesses. We have found that traditional sources of debt (such as banks) simply prefer to extend debt to companies with many assets from which collateral can be obtained.
Any dollar dormant in a savings account or traditional short-term/liquid debt instrument is vulnerable to a real loss of value as inflation skyrockets.
When it comes to SaaS or low-asset business models, there is simply no asset base to collateralise, which makes traditional debt providers uncomfortable. In addition, while subscription or recurring revenue business models are technically not new, they have not been sufficiently supported. SaaS companies often cannot obtain financing from traditional banks until they are profitable and/or have received institutional venture capital.
This rules-based approach is pragmatic, but results in a huge market gap for startup companies that have achieved product-market fit and serious revenue growth. If they don’t fit on the “checklist”, they are simply thrown in the backlog until all the boxes can be checked, regardless of the underlying traction.
Revenue financing gives founders more control over their decisions without compromising board seats. SaaS companies can especially benefit from this model, as it promotes future revenue from customers who are already signed up.
Revenue financing enables companies with a healthy growth trajectory to gain instant access to future cash flows from their customers’ monthly payments. Another advantage is that borrowers’ credit limits can be adjusted according to their monthly expected growth, and they can withdraw money when they need it.