Revenue Based Financing vs. Debt Financing

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There are a variety of financing options for businesses to choose from. Some of these work for any business, while others are targeted to specific industries or business models.

Most businesses use some debt financing -- often in the form of bank loans -- to fund their business growth. While debt financing does have some advantages, it is not a perfect model for all business owners. For many businesses, especially those who get most of their revenue from monthly subscriptions, revenue-based financing can be extremely helpful. We are here to break down the differences between revenue-based financing vs. debt financing.

Advantages and Disadvantages of Debt Financing

With debt financing, you receive a designated amount of money that you will have to repay with a fixed percentage of interest. Your previous credit history and where the loan comes from will have a significant effect on the interest rates you receive.

Here are a few advantages of debt financing:

  1. Predictable payments. When you obtain a loan, you know exactly how much your monthly payments will be, and the exact amount of time it will take to pay them back. The only way that your terms change is if you fail to make a payment. This predictability allows you to easily manage your budget and balance your bank account.
  2. Low cost of capital. Assuming you have good credit, your loan should have relatively low interest rates.

Here are a few disadvantages of debt financing:

  1. No fluctuation. If your business under-performs or some major unexpected costs arise, that predictability can actually be a disadvantage. It may put you in a difficult situation where you can’t make the payments you need to.
  2. Personal guarantee. Banks and other lenders want to be prepared in the event that your business doesn’t generate revenue as expected. That’s why most will require you to personally guarantee repayment.
  3. Strict. To obtain a loan, you must have — and follow — an exact plan for what you will do with the money. These covenants — or financial performance guidelines — limit what you can do with the capital.

Advantages and Disadvantages of Revenue-Based Financing 

With revenue-based financing, which also goes by royalty-based financing (RBF), the amount you pay is entirely dependent on your cash flow for that month. You choose a percentage of your monthly revenue that you will be required to pay, but that actual number will change each month. Most revenue-based providers focus on companies whose primary income comes from monthly subscriptions, such as SaaS.

Here are some advantages of revenue-based financing:

  1. Fluctuation. Since your income will fluctuate depending on the number of subscribers you have that month, your repayments will as well. This fluctuation gives you flexibility and prevents a situation where unexpected costs put you in a bad situation.
  2. Flexibility. Most revenue-based financing is used for growth capital, which allows you to use the capital you get for a variety of things. Whether you are looking to develop new products, make new hires, or improve your marketing strategies or tactics, RBF gives you the tools to invest in and improve your business.

Here are some disadvantages of revenue-based financing:

  1. Need high growth potential. RBF providers are banking on your revenue increasing so that they receive the return on their investment quickly. As FitSmallBusiness puts it, “the RBF provider sees better returns the faster you pay the loan in full. This is one reason the underwriting process is focused not only on your current revenues, but also on your business’ potential to quickly increase revenues.”
  2. Higher cost of capital. Compared to debt financing, the amount you will generally have to pay is higher to receive this type of capital. FitSmallBusiness says that the typical range for interest is 18-30% of the initial amount of capital provided.

What Does RevTek Offer? 

Here at RevTek, we understand that not all types of financing are created equal, especially for technology companies who have significant monthly revenues that fluctuate based on subscriptions. Fixed loan payments can inhibit growth, while alternative forms of financing — like venture capital — require giving up ownership and control.

With all of those drawbacks, we decided to create a simpler, better process. Our model is simple: we provide the capital, and you pay it back in manageable monthly payments based on your monthly, recurring revenue. To be eligible, you do not need to be profitable, but you should have a predictable recurring revenue of at least $50,000 a month. The benefits are substantial.

  • We don’t take your equity.
  • We don’t take any control or ownership.
  • Our terms are simple and easy.

 

If you are looking to finance your business with revenue-based financing, choose RevTek. Our experienced team can provide the capital you need to expand. Contact us today to learn more about how we can help your business grow.

Funding Solutions from RevTek Capital

If you are looking to raise capital for your startup, choose RevTek.

Our experienced team can provide you with the money you need to expand your tech startup.

Contact us today to learn more about how we can help your business grow.

If you are looking to obtain growth capital or move into a new market, contact us today.

Download our free eBook

"Scaling Valuation Secrets for SaaS Companies"

Types of Investor Funding for Businesses

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It is virtually impossible to start or grow a business without some outside capital. Whether it’s to get your business off the ground or improve your products or services, there are a variety of types of business financing for companies of all sizes and in different stages. It is important for business owners to understand their business financing options so they can make the best decisions regarding capital.

What Are the Different Types of Investor Funding?

Before we explain the different financing options, it is important to understand that most businesses don’t choose just one type of financing. Depending on the point in time, each of these can provide a boost of capital to help a business start, grow, or expand. Sometimes, there are hybrid forms that mix and match between these different types of investor funding options.

Debt Financing

The most traditional way of obtaining financing is debt. The most common debt form is a term loan, which involves an entity providing a business with capital that they will return with interest in monthly payments.

One of the most common examples of this format are bank loans, which usually have reasonable interest rates but are also difficult to obtain. The business owner will need to demonstrate a solid credit score, an excellent business plan, collateral, and a willingness to invest their own capital.

As MHA Broomfield Alexander points out, there are alternatives for people who haven’t developed a stellar credit history or operated their own business. “One possible source of guarantee for finance is the Enterprise Finance Guarantee under which the Government will guarantee lending to viable businesses to ensure they can secure the working capital and investment they require.”

Equity Financing

Another common way to raise money is through equity financing. In this model, an entity provides financing in exchange for ownership stakes and or control in your company. Individuals will occasionally provide equity financing, but this usually comes from firms.

Equity investors typically want to invest in companies that have significant profit potential so that their shares increase in worth. However, some equity investors will also invest in older companies that are restructuring or expanding.

Compared to debt financing, equity financing typically leaves a company with significantly more capital. With the firm or individuals taking as much as 50% ownership, the business owner will no longer be exclusively liable for their company. However, giving up ownership and control can also lead to conflict and different visions for the business.

Venture Capital

Venture capital is available to a very specific niche: young technology companies with overwhelming potential. Venture capitalists usually choose early stage technology companies that have demonstrated the ability to be successful, but haven’t yet reached their full potential. By investing in startups, venture capital firms take major risks that also could have major rewards.

Venture capital is a form of equity financing. They provide capital in exchange for ownership stakes, which they plan to sell for a profit further down the line. Most venture capitalists have a long-term plan of gaining profits as the company grows.

Since their investments are risky and don’t always yield profits, venture capitalists generally invest less than $10 million into any given company. This allows them to maintain a large number of portfolio companies without being overly dependent on any of them.

Angel Investors

While not as common or consistent as some of the other methods, angel investors can be a major help to startups. Sometimes, angel investors can be friends or family. More often, however, industry professionals serve as angel investors.

Another common form of financing that falls under this umbrella is crowdfunding. By motivating regular people to invest small amounts of money into your company, you can simultaneously market yourself and gain money.

What Does RevTek Offer?

With all of the types of business financing out there, we decided to create a simpler, better process. Our model is quite simple: we provide the capital, and you pay it back in manageable monthly payments based on your monthly, recurring revenue. To be eligible, you do not need to be profitable, but you should have a predictable recurring revenue of at least $50,000 a month. The benefits are substantial:

  • We don’t take your equity.
  • We don’t take any control or ownership.
  • Our terms are simple and easy.

 

If you are looking to raise capital for your startup, choose RevTek. Our experienced team can provide you with the money you need to expand your tech startup. Contact us today to learn more about how we can help your business grow.

Funding Solutions from RevTek Capital

If you are looking to raise capital for your startup, choose RevTek.

Our experienced team can provide you with the money you need to expand your tech startup.

Contact us today to learn more about how we can help your business grow.

If you are looking to obtain growth capital or move into a new market, contact us today.

Download our free eBook

"Scaling Valuation Secrets for SaaS Companies"

How to Set Repayment Caps in Revenue Based Financing

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Businesses of all sizes and models need outside capital to reach their goals. Whether it be for a new business that wants to purchase preliminary equipment or for a more established company that is looking to expand into a new market or develop a new product, capital is king.

One financing model that is growing is revenue-based financing, which works exactly as it sounds: the amount you pay depends on your monthly revenues. In this post, we will talk more about how the model works and explain how to set repayment caps in revenue-based financing.

How Does Revenue-Based Financing Work?

While business loans, bank loans, and other debt financing options have fixed monthly payments, revenue-based financing involves payments based on a percentage of your monthly revenue. This means that the amount due will change every month.

If you have a hot month with lots of sales, your monthly payment will increase to match. If your business experiences a cold spell where your cash flow decreases, your payment will drop accordingly.

Revenue-based financing differs from venture capital. While venture capital involves giving up some equity or ownership in a business in exchange for financial assistance, in revenue-based financing a business promises a percentage of its future revenues.

One way to think of revenue-based financing is like a longer-term merchant cash advance with monthly payments, higher dollar amounts, and slightly higher interest rates.

Generally speaking, businesses seeking a revenue-based loan will not be able to obtain more than ⅓ of their annual revenue and will be required to pay anywhere between 2 and 8 percent of their monthly revenue.

Lenders who offer revenue-based financing are looking for companies that have strong growth potential. If a company grows quickly, the deal will be beneficial for both the lender and the borrower.

On the other hand, if a business seriously underperforms its expectations, revenue-based financing could result in a large balloon payment at the back end of the term. Since there is so much fluctuation in payments, however, most lenders who provide this niche financing model implement a range of time for the term limits.

Who Uses Revenue-Based Financing and What Do They Use It For? 

Businesses seeking revenue-based financing generally have these characteristics:

  • Are fast-growing with high growth potential
  • Have a detailed plan about how they will use growth capital and scale their company
  • Maintain minimum gross margins of 50%
  • Maintain monthly revenues of at least $25,000

The ideal candidate for revenue-based financing is a technology or software as a service (SaaS) company with serious recurring revenue and scalability.

Most borrowers are medium-sized companies. Small businesses usually don’t have that level of recurring monthly revenues, while larger businesses usually need a larger amount of capital.

To obtain a loan with revenue-based repayment plan, you will need to demonstrate a specific plan of how you will use the money to generate more revenue. Generally, lenders prefer companies that will use the money to grow their business, as this theoretically increases the company’s revenues, and therefore their monthly payments.

Here are some common purchases that companies make with their growth capital from a revenue-based financing lender:

  • Hiring new employees
  • Expanding into a new market
  • Conducting a sales initiative
  • Developing a new product or service

What Are Repayment Caps and How Do I Set Them? 

A repayment cap is the total amount that you will have to pay, which includes the principal and interest. Generally, you will multiply the principal with an integer ranking from as little as 1.3 to 1.8, and that final number is your final cost.

The equation: principal x cost of capital integer = repayment cap

The more money that you borrow, the lower your repayment cap will be. Additionally, the better your credit history and the more monthly revenue you bring in, the lower your cap will be.

For instance, if you want to borrow $100,000 from a revenue-based financing model, your repayment cap will likely be closer to 2 and end up paying in excess of $200,000.

On the other hand, if you are able to obtain a loan for $2 million, your repayment cap should be toward the lower end of that range, since the actual amount will greatly exceed what you would pay in the $100,000 example.

While the cost of capital tends to steer higher with revenue-based financing than other alternatives such as debt financing or venture capital, it is worth it for many companies. It provides financial flexibility without requiring equity or collateral.

What Does RevTek Capital Offer? 

RevTek is a revenue-based lender for a wide array of growing tech companies. We provide a combination of capital and freedom that can help you expand your business.

Our model is simple: we provide the capital, and you pay it back in manageable monthly payments based on your monthly, recurring revenue. Our repayment caps usually fall between 1.3 and 1.8.

To be eligible, you do not need to be profitable, but you should have a predictable recurring revenue of at least $50,000 a month.
Whether you are a young startup looking for venture capital or a mature company interested in obtaining growth capital, RevTek can help. Contact us today to schedule a consultation with one of our experienced team members at (602) 730-4558.

Funding Solutions from RevTek Capital

If you are looking to raise capital for your startup, choose RevTek.

Our experienced team can provide you with the money you need to expand your tech startup.

Contact us today to learn more about how we can help your business grow.

If you are looking to obtain growth capital or move into a new market, contact us today.

Download our free eBook

"Scaling Valuation Secrets for SaaS Companies"

Seed Funding: How to Raise Capital Without Giving Up Equity

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Starting a business requires capital. One of the most significant decisions made in the early stage of business development is raising the money needed. There are many ways to finance business.

Many founders use short-term sources such as friends and family or bootstrapping (self-funding) to get businesses off the ground in the beginning stages. But they soon find that these measures are not sustainable in the long term, as they only provide a minimal amount of cash flow. Alternatively, some businesses find themselves with rapid growth rates and in need of large sums of money to continue to scale at high speed. They then turn to equity investors such as Venture Capital options, which typically make equity investments in the million-dollar range.

But what about the growth between these two stages of securing capital? Some companies find themselves needing more than what friends and family can supply. However, they do not intend to trade equity or give up full control of their business, or they simply require smaller investments. In this case, there are several non-dilutive alternative funding sources available.

Grants

Grants are a way to receive funding without having to repay anything in return. Applying for a grant is a great way to connect with seed investors who desire to partner with a specific business type, such as women or minority-owned businesses.

Micro-Patronage

This method is a way to raise money through smaller donations from multiple investors, otherwise known as crowdfunding. These individuals do not receive equity in the company or a return on investment. They typically choose to invest to receive a bonus such as an extra exclusive product or first access to availability.

Contests

Arguably the most creative of options, contests allow founders to receive funding based on pitching their vision or business plan. Pitching contests can involve cash prizes, advice, or opportunities for business partnerships. This funding source is not the most reliable. Still, it is an excellent opportunity to network and meet potential investors, specify the business plan, and practice giving a pitch.

Small Business Loans

Though many traditional banks are unwilling to open a line of credit for a startup company without a proven history of growth, it is possible to find specific lenders who specialize in funding small business startups.

Local credit unions may also be willing to take a risk with a startup when well-known corporate banks may not. This method of funding may require more research or legwork than simply sending in an application. However, it is an option worth considering since small business loans do not require that a founder give up any equity.

Revenue Based Financing

Of all the options to secure seed funding without equity involvement, Revenue Based Financing is the most reliable and widely available. It does require some history of monthly recurring revenue (MRR). Still, for a business that is doing well after funding from these mid-sources and needs an extra boost in business, RBF is the natural next step.

It is relatively easy to secure after submitting the right paperwork, unlike seeking and convincing an angel investor in silicon valley. And RBF does not require that any equity is given up, like in VC financing.

At RevTek Capital, we seek to help you raise capital without giving up equity. This is achieved by growing and funding your business through the lowest cost of capital available. We provide quick solutions for funding early-stage growth, as well as advice and guidance from knowledgeable entrepreneurs to help reach your business goals.

To start a conversation about how RevTek can help your business grow, contact us at (602) 730-4558, to schedule an appointment.

 

Funding Solutions from RevTek Capital

If you are looking to raise capital for your startup, choose RevTek.

Our experienced team can provide you with the money you need to expand your tech startup.

Contact us today to learn more about how we can help your business grow.

If you are looking to obtain growth capital or move into a new market, contact us today.

Download our free eBook

"Scaling Valuation Secrets for SaaS Companies"

What are the Problems with Venture Capital?

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Venture Capital funding is a billion-dollar industry based out of silicon valley that most technology and software companies turn to at some point in the start-up or growth stages. They believe this will help them get a boost in funding to take their company to the next level.

There are advantages and disadvantages of venture capital, as with most avenues for raising money. Still, many small tech businesses are turning away from venture investors and seeking alternatives. Why is that?

Pressure to Grow

When venture capitalists invest, they intend to see growth. Of course, the founders also want to see their company grow. But investors' added pressure and input might influence owners to make big decisions at an early stage that they would not otherwise make.

It is also challenging to measure growth outside of numbers, such as revenue, staff size, and business scale. But many factors that play into making a company successful are not measurable by a number, such as drive, intelligence, business sense, etc. The key is to remember that just because something is big does not always make it better.

Grow Fast at All Cost

One aspect of the VC industry business model is to see an investment reach a return of $100 million by the end of the first year. One misbelief that leads to turning to venture capital investments is that the only thing a start-up lacks is capital. Therefore the belief is that any start-up with a great idea can reach that goal with an influx of cash.

But capital alone cannot ensure that a company has a firm foundation of staff, procedures, product, management, etc. Risky decisions are required to reach the growth metric, including cutting corners, sacrificing quality, and risking burn out to get the intended goal.

Unchecked Issues

Because of this pressure to grow and move quickly, many issues are overlooked or ignored with the mentality that they will "fix it later." When the primary goal is speed, then quality and error correction get overlooked. However, this practice tends to catch up with companies.

For instance, selling a product or service at a high price point may reach an intended profit goal. Still, if the quality is never ensured or evaluated, reputation may decrease. This impact leaves the company with a more significant problem than when they started.

Lack of Long Term Thinking

Many times, decisions made to reach fast growth are not sustainable, such as hiring large amounts of salespersons or experts who do not bring in enough profit to sustain high salaries. The dilemma then becomes decreasing staff, which may hinder growth or contribute to a high staff turnover due to underfunding. This situation is lose-lose for all when the company reaches its breaking point.

Venture Capital firms also tend to convince founders to overestimate their potential to reach the all coveted "unicorn status" as a company. These firms tend to operate in the belief that the founders will receive a massive payout when selling and will have them turn down "lesser" offers. This practice leads to disappointment when a founder finds they must sell at a lower number than an offer they may have previously received.

For a VC firm, selling a company for $100 million does not reach the current measure of "success" in the venture capital industry. But for the owner of a start-up company, that number is hugely successful.

VC Input

The most stressful and potentially detrimental aspect of seeking venture funds is the sacrifice made in ownership and decision making. Most venture capitalists trade funding for a spot on the board or part ownership of the company, which can be beneficial for having expert input and advice from those who have seen success in the past.

Seeking venture funds also increases the potential for a founder to lose control of their company. They may implement strategies that have been "proven" to work for other companies but will not work now. There is a great tendency to copy what other successful companies have done in the VC world rather than replicating the mindset behind what made them successful.

The Venture Capital Industry is one of high risk, high reward. Therefore many VC firms have diversified portfolios of investments, knowing that two-thirds will be written off as failures. They count on the remaining third to make up for the loss and produce a profit.

Therefore for small businesses in need of capital, it may be a better choice to partner with a different capital investment type. One that does not see the potential of failure to write off, but as a business whose success is tied to their own.

Alternative Choice

During the dot com bubble of the '90s, Venture Capital rose to extreme heights as the leading way to grow business in the world of technology and the internet. But just as technology is always evolving and growing, capital ventures should be too. Though limited partners, those who invest in VC, are mostly unwilling to risk new strategies, the good news is that new investment opportunities are beginning to emerge.

At Revtek, we desire to see your company grow at the rate and speed that you know is best for you. We offer the lowest cost of capital available and increments that will not force you to make significant and profitable decisions at the expense of quality. We offer experienced expert advice to you but do not require input into how you do business. Our involvement is entirely up to you.

To start a conversation about how RevTek can help your business grow, contact us at (602) 730-4558, to schedule an appointment.

 

Funding Solutions from RevTek Capital

If you are looking to raise capital for your startup, choose RevTek.

Our experienced team can provide you with the money you need to expand your tech startup.

Contact us today to learn more about how we can help your business grow.

If you are looking to obtain growth capital or move into a new market, contact us today.

Download our free eBook

"Scaling Valuation Secrets for SaaS Companies"

RevTek Capital and The Basics of Tech Startup Funding

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Silicon Valley knows that raising capital, in the beginning, is the most challenging stage of a startup for many tech company founders. They are aware of a pain point in the technology market or have an incredible new product to sell, yet initial funds inhibit them.

The world of technology is the fastest growing industry, and it shows no signs of slowing down. It is more important than ever to obtain cash at the beginning of your company’s journey so you can explode with the growth you project.

However, ample startup funds never have to deter you from launching your tech business. There are different tech startup funding options available, so you can generate the company growth you desire right from the start.

There are two basic categories of funding options: funding through debt financing and offering equity in exchange for funding. All of the various ways to raise capital fall under one of these two categories.

Debt Funding

Securing capital through debt that you must repay with interest is a financial choice that most people are familiar with, whether from personal or business experience. Debt funding for your tech startup is the same. Securing a bank loan with collateral or using credit cards to fund your finances is a quick way to get your company up and running.

However, there are higher interest rates for new tech startups because banks know the risks involved. Debt funding can have negative consequences if your company cannot pay back the money in a short time. This is because you may quickly find yourself in more debt than intended and saddled with debt for years to come.

Equity Funding

Seeking venture capital by exchanging equity for funds is a popular form of raising capital for tech startups. With this experience, investors produce funding in exchange for a percentage of ownership in the company. Equity funding is typically secured in early-stage Series A funding when there is still significant equity available.

Venture investors, including angel investors, are in the business of funding startups to earn a percentage of the profits. This option is excellent for entrepreneurs who do not wish to take on debt, but they run the risk of losing company control with every venture capitalist that comes on board. If your company gives away more than 50% in equity, you no longer own the most significant stake in your company, which can be detrimental when making decisions or selling the company.

Funding with RevTek Capital

Debt funding and equity funding have pros and cons that define them as different finance options for your tech startup company. If you have the next fantastic product for the technology industry, but cash is a problem, these solutions may be the catalyst you need for significant initial company growth.

Funding with RevTek Capital falls under the debt funding category but without the same amount of risk as with most debt options. We provide what we call Revenue Based Financing, which is an excellent finance option for tech startups already producing recurring monthly revenue but need a boost in capital to reach the next growth benchmark.

If you have any questions about the difference between debt funding and equity funding and would like to discuss the best path forward for your tech startup, we would be honored to help. Give us a call to our office at (602) 730-4558, and a finance specialist will get back to you on how to get you the cash your company needs for massive growth.

Funding Solutions from RevTek Capital

If you are looking to raise capital for your startup, choose RevTek.

Our experienced team can provide you with the money you need to expand your tech startup.

Contact us today to learn more about how we can help your business grow.

If you are looking to obtain growth capital or move into a new market, contact us today.

Download our free eBook

"Scaling Valuation Secrets for SaaS Companies"

Cost of Sales for SaaS Company

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Many different metrics are essential to understand when running a Software as a Service (SAAS) Business, such as Monthly Recurring Revenue, Churn, Net Retention, and others. COGS, or the cost of what it takes to deliver a product or service, is also among those crucial metrics.

Unfortunately, it can be one of the most challenging numbers to calculate because no Generally Accepted Accounting Principle (GAAP) outlines what information must be included in COGS. Therefore, many businesses vary in their approaches to product and service costs.

Learning about COGS and knowing how to calculate the figures accurately will allow you to determine the total cost of producing and delivering your service. Additionally, you will be able to calculate your gross profit and gross profit margin accurately.

We have outlined a few of these concepts below to help you get a basic knowledge of COGS.

What is COGS?

The Costs of Goods Sold (COGS) is the amount of money required to deliver a product or service. A traditional product involves materials, production, and delivery costs while separating overhead operation expenses like rent, commissions, and salaries.

How is COGS different for SaaS Companies?

Because SaaS products are subscription-based services delivered online, it can be challenging to calculate COGS because the enumerated costs are not precise. There are many associated costs for SaaS that do not apply to a traditional product, such as embedded third-party software, hosting and data expenses, and website development.

A general rule to follow for COGS in a SaaS company is that if you could deliver the service without the expense, do not include it in the total cost.

With a traditional or physical product, personnel-related services such as salary, commission, and customer support are not included in COGS. However, for the SaaS industry, these professional service costs are included in COGS on a case-by-case or situational basis, which is often a crucial part of delivery.

How to Calculate COGS and Gross Margin

You subtract the production cost of unsold inventory since accurate COGS only include the production costs of goods sold. However, subscription software companies do not typically have inventory carried over from year to year, so the equation is straightforward once you have determined the elements you will include. Simply add up the costs accrued during the defined period.

Having an accurate COGS is crucial because it determines your gross margin. The accepted suggestion is that your SaaS Companies’ gross margin should be 80-90%. The calculation is as follows:

Total Revenue - COGS = Gross Margin (%)

Achieving a higher margin is essential because this is overhead costs and salaries come out of this margin. Higher margins mean more investment and growth opportunities.

COGS and Capital

The COGS for your SaaS business directly affects your options for capital because lower costs of goods create higher margins and, therefore, more profitability. Having accurate calculations and high profitability increases the likelihood of willing potential investors.

At RevTek Capital, we invest growth capital and expert knowledge to help you achieve lower costs of sales for your SaaS company and increase the accuracy of your COGS calculations.

Are you ready to partner with us to help your SaaS Business thrive? We are excited to talk to you about your business and growth strategies and connect you to our network of investors. Give us a call at (602) 730-4558 to begin a conversation.

Funding Solutions from RevTek Capital

If you are looking to raise capital for your startup, choose RevTek.

Our experienced team can provide you with the money you need to expand your tech startup.

Contact us today to learn more about how we can help your business grow.

If you are looking to obtain growth capital or move into a new market, contact us today.

Download our free eBook

"Scaling Valuation Secrets for SaaS Companies"

Net Retention Rate in SaaS

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When you are running a business, you always want to keep a close eye on whether your company is thriving and profitable. For most companies, the number one metric to track is Monthly Recurring Revenue (MRR) but because subscription revenue is the key marker of a Software as a Service (SaaS) business, a different metric is needed to grasp the true health of your company. This is why Net Revenue Retention is one of the most important indicators for SaaS companies.

What is NRR?

Net Revenue Retention (NRR), also referred to as net dollar retention, is one of the most valuable Key Performance Indicators in SaaS Metrics. This metric calculates the health of a company based on the existing customer retention rate. Not only does it measure how successful a company is at renewing or sustaining customer contracts but also how well it is doing at generating additional revenue from this existing customer base.

By keeping close tabs on what is happening with your customer’s journeys through measuring the NRR, you are able to better gauge customer success in your company as a whole. You will have a good picture of how long customers use your product, what kinds of products they choose to upgrade, and how often they unsubscribe. Knowing this information helps to make long term plans for how to increase the value of your business in the future.

Four Factors Used to Calculate NRR

Monthly Recurring Revenue

This is the amount of revenue that a company can expect to receive in a given month.

Expansion Revenue

This is the amount of revenue that is added in a time period due to upgrades and cross sells.

Revenue Reduction

This is the amount of revenue that is subtracted due to downgrades to lower payment plans.

Revenue Churn

This is the amount of revenue lost due to customer cancellations.

Calculating NRR

To calculate your company’s Net Retention Rate, you begin by adding the MRR and Expansion Revenue together. This is the total revenue for the month. You then subtract the month’s revenue lost due to downgrades and cancellations. Then divide by the original MRR number. This result should be a percentage over 100% if your business is operating with healthy growth.

For example, let’s say last month’s MRR is $75,000 and your expansion for the month was $10,000. Reduction and Churn were low at $2,000 each. That equation would be:

(75,000 + 10,000 - 2,000 - 2,000) / 75,000 = 108%

This shows that despite reduction and churn for the month, the company is still growing without any added customers.

Difference Between NRR and GRR

Net revenue retention rates and gross revenue retention are very similar metrics. The difference is that gross revenue retention does not factor upsells and upgrades into account. This gives a different perspective and more precise view at calculating the customer churn rate. This method of measuring churn helps to see exactly how your company is being affected by customers leaving your business. Both of these metrics are important for measuring the health of your company.

RevTek Capital’s Role in SaaS

RevTek Capital’s Role in the Software as a Service world is by providing low cost capital through revenue based financing to help you reach your next growth level. Above simply earning business, we desire to develop partnerships with thriving companies and we desire to help you get there.

Our team can not only help by providing growth capital but we can also connect you with experts in SaaS metrics.

Click here->  Schedule an appointment with us today or call (602) 730-4558 if you are ready to grow and need more assistance with calculating Net Retention Rate in SaaS.

Funding Solutions from RevTek Capital

If you are looking to raise capital for your startup, choose RevTek.

Our experienced team can provide you with the money you need to expand your tech startup.

Contact us today to learn more about how we can help your business grow.

If you are looking to obtain growth capital or move into a new market, contact us today.

Download our free eBook

"Scaling Valuation Secrets for SaaS Companies"

The Basics of the SaaS Business Model

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Software as a Service is a booming market in the business industry. SaaS Businesses are known for overnight expansion, high dollar buy-outs, and attainable growth for young up and comers.

Essentially, to start a successful SaaS company, one needs three things: a marketable idea, a team of professionals, and funding. Seems easy enough, right?

Though the premise of that statement is true, some key focuses of the SaaS model make the business different from traditional software companies.

Perhaps you are new to the industry, or you are looking to throw your hat into the ring of SaaS. If so, we have outlined below a few of the basics to help you set your best foot forward.

Understanding SaaS

Software as a Service is a model of business where software is stored and operated through a cloud-based system. Users do not possess a physical product but access the service through a login or membership. These memberships are not a one-time payment upfront but are paid by monthly subscription or through contract period memberships.

The SaaS product is software, but the business's primary focus is the second "S" in the name: Service. The focus on offering a specific service is what sets this business model apart. There is a service element involved in how customers access the product, interact with the product, and pay for the product.

Aside from being cloud-based, there are a few key elements that are unique to the SaaS Business Model.

Three Key Focuses:

Recurring Revenue

The method of revenue growth in SaaS is one of the most appealing aspects of the business. Software of the past consisted of a customer making a one-time purchase of a disk and then installing software on a desktop. SaaS entails customers continually purchasing access to a service to access the desired software.

This means that with SaaS, revenue is recurring and is therefore growing. Because of this, revenue recognition is calculated using Monthly Recurring Revenue or Annually Recurring Revenue depending on the pricing model that is offered.

SaaS Business owners can count on revenue recurring over time. They can therefore make long-term plans for how much money the business will bring in each year. They can also use this knowledge to make educated decisions for where to invest cash flow in order to expand.

Because the company does not have to focus on convincing customers to purchase again, most of the business focus is spent on keeping current customers satisfied and acquiring new lifetime customers.

Customer Attention

Customer satisfaction is always a concern of any business in any industry. Undoubtedly though, the most unique aspect of SaaS is the attention that is focused on building customer relationships and interactions. Because revenue is earned on a recurring basis, retaining customers is the number one way to ensure that your SaaS business remains profitable.

It is commonly known in the industry that it costs more to acquire new customers than to keep existing customers. Therefore, a successful SaaS company spends the most time and focus on providing a quality user interface, customer experience, and help desks or assistance programs.

Customer Churn is inescapable to some degree. Therefore, SaaS Sales and marketing dollars that focus on new customer acquisition are tailored to the degree of contact the potential customer may receive from a representative.

For instance, low-touch contact such as free or low-cost advertising for a "freemium" plan requires fewer dollars spent per individual. Whereas high touch contact such as dedicated salesmen or representatives that manage enterprise relationships may cost more but acquires a more significant number of sales.

Metrics & Adaptability

SaaS companies spending time and money developing direct relationships with their clients allow for a unique opportunity in business. This is to assess the needs and satisfaction of the clients and make necessary changes in real-time.

The SaaS business model can track many metrics that other businesses cannot track on a monthly scale, such as MRR, efficiency, and churn, among others. This opportunity allows SaaS owners to constantly develop new versions and updates, offer new programs, and work out bugs in systems to provide seamless service.

This adaptability is not only an opportunity but a necessity for SaaS companies because of the competitive nature of the business. In most cases, there are always new competitors looking to poach clients. The key to customer retention is integrating your service into your customers' lives so that you become essential to their life and business. This involves constantly keeping a listening ear to their concerns and needs while consistently offering top-quality products and services.

Bonus: Endgame

It seems counterintuitive for a startup business or a thriving company to start with the end in mind. Still, in the SaaS industry, it is essential. The exit strategy of your SaaS business should always be a key focus. This will help you to determine where your growth strategies need to be focused throughout the process of building your company.

Because the market of SaaS business is overly saturated, for most, the trend seems to be: never stop adapting or be overtaken. Because of this, there are typically two end goal options that allow for businesses to stay on top: go public or get bought out. Many companies get acquired by large software corporations, while some seek the riskier option of going public.

Though because the world of SaaS is still fairly new, there are no written rules for how things must go. The industry itself is constantly adapting, and companies are inventing new ways to stay on top every day.

It is wise for a new SaaS business owner to have an idea of the direction they are headed in order to form a steady plan for how to get there.

Funding Your SaaS Business Model

There is a key stage for every SaaS business where funding is needed to reach the next growth level or goal. Whether a new startup seeking hypergrowth or an established SaaS business seeking to expand sales or refine a product, RevTek Capital is available for your cash flow needs.

At RevTek Capital, we have an experienced team of professionals familiar with the SaaS Business Model's key focuses. We desire to partner with you to help your SaaS Business reach your next growth metric.

Click here->  Schedule an appointment with us today or call (602) 730-4558 to begin a conversation about how RevTek Capital can help you.

Funding Solutions from RevTek Capital

If you are looking to raise capital for your startup, choose RevTek.

Our experienced team can provide you with the money you need to expand your tech startup.

Contact us today to learn more about how we can help your business grow.

If you are looking to obtain growth capital or move into a new market, contact us today.

Download our free eBook

"Scaling Valuation Secrets for SaaS Companies"

How to Finance Your Business: The Starter Guide

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When entrepreneurs are looking for funding options, they are usually not seeking advice such as "crowdfund" or "ask friends and family." While legitimate funding methods, most companies need something more reliable and in greater amounts than these methods generally provide. At this point, a business seeks more serious financing options from banks, external firms, and even non-profits.

However, finding the right funding can be a challenge for your company, especially when considering the various pros and cons of each method. As such, it's important to educate yourself on the types of business financing available to you, and ultimately, select the best financing for your needs.

Get Financed Now!

Understanding Two Common Types of Funding

The first step in financing your business is determining what you are willing to compromise: ownership or financial freedom. For those that are in earlier stages of developing their business, or managing a company that is locally sustained, answering this question is going to be the guiding force between which type of financing options are available to you.

Debt Financing

This is the type of financing with which many are most familiar. Debt financing includes many familiar channels of debt, including bank loans, borrowing from friends and family, and credit cards.

While this method offers quick coverage if your credit score is good, the method poses severe risks to your personal finances. If you are unable to make a payment, it's your personal assets that are on the line. Secondarily, in the process of repaying your debt, you will be responsible for interest payments on your outstanding balance— raising your overall monthly cost.

Examples of Debt Financing

  • SBA Loans
    The unique feature about SBA loans is that they are backed by the federal government. In addition, there are 14 types of SBA loans, meaning those with trouble finding financing usually can find what they are looking for through at least one of these programs.
  • Term loans
    Term loans are among the most familiar though not always the most useful, especially to newer businesses.
    A term loan offers a fixed amount of funding that you acquire for a specific purpose. You then repay that loan over a fixed period of time at a fixed rate of interest. As you can imagine, these plans are rigid and not always a good option for businesses with fluctuating or seasonally impacted revenue.
  • Invoice financing
    This type of financing allows businesses to use their unpaid invoices as collateral for a loan. Most useful for businesses that run off credit or experience long waits between rendering service and payment, using invoices as collateral, is often a good way to improve company cash flow.
  • Business Line of Credit
    This type of financing is incredibly flexible if (and when) you are granted coverage. Essentially, it works similarly to a credit card, offering you a line of credit for using many experiences with few questions asked. Having an increased line of credit can thus help forward costs on expensive equipment or hold out during a time of decreased revenue.

Equity Financing

On a personal scale, there are generally fewer opportunities for equity financing because the practice doesn't apply. In equity financing, you will sell some percentage of your business to another individual or firm. In exchange for this percentage, you will receive funding.

Unfortunately, by selling a percentage of your business, you are also selling some of your decision making powers. After all, if a firm is bankrolling your endeavor, they will want a say in how it grows.

Examples of Equity Financing

  • Venture Capital
    Venture capital funding is the star player in popular investment shows such as Shark Tank. As part of the financial exchange, the venture capitalist, whether a firm or individual, usually provides business guidance and networking to the business through their firm.
  • Angel Investments
    As the name suggests, these are benevolent investors who operate as individuals to give financing to early startups. Apart from operating as individuals in the earliest and riskiest stage of financing, angel investment works similarly to venture capital, with the investor asking for an interest in the business equity in return for their assistance.

A Balancing Act

The main differences between these types of financing is the long term impact on financial freedom and decision making power within the business.

When you borrow money from a financial institution, you are responsible for the repayment of long-term loans. This can sometimes financially handicap your cash flow as the same monthly amount is always due regardless of your income. Should you ever be unable to make payments, your business and personal finances will be at risk.

In the case of equity financing, these problems largely go away. The result, however, is the risk this type of financing poses to your overall business plan. When selling equity in your company, you give decision-making power over to your lenders. The greater percentage they own, the more power they have. This makes it imperative that, if you do go the equity route, you are working with a lender that has similar goals and visions to your own.

A Third Option: Revenue Based Financing 

The best financing options for a business often do not fall into either Equity of Debt Financing. Often, individuals do not have the resources available to foot a small business loan nor can they find an equity firm willing to invest. This puts many smaller-scale entrepreneurs at an unfair disadvantage.

At this point, Revenue Based Financing becomes a reliable option so long as a business owner can prove their company is profitable.

Revenue-based financing is completely different— a company gives you a loan in exchange for a portion of your business revenue. This portion is paid to a predetermined point, normally when 3-5 times the amount of the original loan is paid. However, unlike debt financing, there is no interest associated with these costs and there is no need for fixed payment. This is because the payments ultimately function off a royalty system and thus fluctuate in ratio with your profits.

Through this type of financing, individuals can benefit from the security and network of an equity firm without giving up ownership to part of their business. Without a set dollar amount owed per month, a buffer is created against the devastating financial loss of a slow month in a new company.

Together, this makes for a rare financial buffer. Companies are only responsible for a percentage of royalties paid out, meaning there will never be an unpleasant surprise if they experience a slow month. Similarly, they can start a business in the way they desire as they retain full ownership.

For many, this offers more security and freedom than taking on debt or working with venture capitalists.

Entrepreneurs Funding Entrepreneurs

At RevTek, we take qualifying companies and help them reach their expansion goals by giving them the financial support where it's most needed. With a full staff of experienced entrepreneurs, we can help businesses assess their strengths, weaknesses, and help them refine and achieve their goals.

To begin the conversation about how to take your business to the next level, click here -> contact us.

Funding Solutions from RevTek Capital

If you are looking to raise capital for your startup, choose RevTek.

Our experienced team can provide you with the money you need to expand your tech startup.

Contact us today to learn more about how we can help your business grow.

If you are looking to obtain growth capital or move into a new market, contact us today.

Contact Us

Download our free eBook

"Scaling Valuation Secrets for SaaS Companies"