The Funding Life cycle: 5 Stages of Funding for SaaS

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Whether you are a startup, newly established, or an SaaS with a defined product looking to scale, at some point funding starts getting important.

While we have a glorified view of “bootstrapped” companies that made their way from the ground up, this is not reasonable for a large majority of businesses. The competition is too fierce and the products too plentiful. By passing up the opportunity to strategically utilize funding, you will fall behind your competition.

Fall too far behind in the digital world and your product will soon suffer. Ultimately, it could lead to your company failing entirely.

But with all the funding options available today, how do you know which type is right for your business? Where do you fit in? What should you ask for? How much do you need? What are the best sources of funding?

Below, find the 5 categories of funding to see which is right for you.

What Investors Watch For

Before investing in your company, it’s an investor’s due diligence to assess the profitability of your company. This allows them to determine the health of your company, whether or not it has the potential to grow, and how well it will scale into the future.

As such, angel investors, private equity firms, and venture capital firms alike will look at several KPIs to ensure you meet their investment criteria. These could range anywhere from a minimum MRR, CAC, and your overall projected growth strategies.

Keep this in mind— it will ultimately help you make a realistic assessment of which funding type your company most needs.

Pre-Seed Funding

As time goes on, the playing field of startup funding rounds has been subject to many changes. With growing competition to stand out and the need to properly leverage the SaaS growth curve, raising money as early as possible has become increasingly common.

Unfortunately, finding funding at this early stage is incredibly difficult. Not only are companies this small in a vulnerable position, their overall trajectory and business plan may not be well defined. In combination, this poses a serious risk to their overall stability.

Company Worth: $10-100 Thousand

Investment Amount: $1 Million or Less

Common Investors: Angel Investors, Personal Funds, Donations

Seed Funding

This next phase of funding marks the beginning of a company’s first major growth stage.

Here, seed capital is often received from venture capitalists to take a product from a developing stage to something more finely tuned. In exchange, these VCs often exchange their funding for a 10-25% equity stake in your company.

Company Worth: $3-6 Million

Investment Amount: $1.7 Million

Common Investors: Angel Investors, VCs

Series A Funding

Series A is the tipping point where companies finally have a developed product while shifting focus to refining their business model.

By this point in the company life cycle, the focus moves from getting by and gaining tractions to a more sales-orientated perspective. The demands at this stage often involve revenue within the existing market, having a reliable set of KPIs you can realistically meet, in addition to a business model that supports your future growth.

As the core team is usually established by this point, investors begin to take benefit as well— series a financing being the gateway to preferred stock in the company.

Company Worth:$10-15 Million

Investment Amount: $10.5 Million

Common Investors: “Super” Angels, VCs

Series B Funding

While Series A funding looks mostly at growth and gaining market traction, companies looking for Series B funding are more likely to focus on scale, meeting new market demands, and expanding product offerings. This indicates that you know your market, you know which KPIs to watch, and you are looking to take that information and apply it to a larger audience.

With the increase in demand, comes an increase in manpower and a keener look toward strategic marketing decisions. Commonly, at this phase entrepreneurs will use their funding to hire more staff, expand into larger markets, and even see if they can gain a strategic advantage through buyouts or outpacing the competition.

Company Worth: $30-60 Million

Investment Amount: $25-30 Million

Common Investors: VCs

Series C and Beyond

By the time a company reaches Series C funding, they are well established in their industry and looking to move towan in IPO.

There is no limit to the types of funding they can acquire as they years go on, providing these companies remain profitable. In fact, after Series C, it’s reasonable for a company to seek everything through Series E funding if that is the route they choose to take.

At this stage, funding is no longer used to finance growth,

Company Worth: $100-120+ Million

Investment Amount: $50 Million

Common Investors: Hedge Funds, Investment Banks, Private Equity Funds

When Funding Goes Public

Once you have cycled through all the funding tiers, developed a brand, a company, and a team dedicated to success, you might just find yourself in a position to accept IPOs. At this point, you are no longer limited by a small pool of investors, you are opening your company to the general public. Through common stock, your company becomes part of a global economic system alongside some of the heavy hitters in today’s tech industry.

However, we all have to start somewhere. Making the most of where you are today just might be what helps boost your brand tomorrow.

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, contact us at (480) 332-0399 to schedule an appointment.

High Vs. Low: SaaS Customer Onboarding

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At its very core, “onboarding” is a term used to describe the process in which your prospective client learns about your product, makes an account, and decides whether it’s value is worth the subscription cost.

As such, successful client onboarding is much more complex than getting an individual to make an account or sign up for a freemium plan– it’s about a clean sales process which ultimately leads to client retention.

From the first point of contact all the way to the quality of your customer service, building a skillful onboarding process is an art form every SaaS Entrepreneur should learn, refine, and consistently update.

Looking to improve your current client onboarding process steps? See below for our top categories to keep in mind.

Reduce Your Friction

The main piller of successful customer onboarding is managing “friction”.

Generally speaking, this term implies the level of difficulty a new customer encounters when making an account and learning to use your product. The more friction there is in your onboarding process, the less likely you are to have a successful onboarding attempt.

Depending on the type of population your software is built for, friction can occur in vastly different areas. To determine what your friction areas may be, consider asking yourself the following questions:

  • What is the age of my target audience?
  • What is their level of technological literacy?
  • Is my software simple, or complex?
  • Will future clients rely heavily on live tech support to troubleshoot? 

In the sections below, we will explore how different methods of onboarding can reduce any challenges faced by your user base.

The Great Debate: High-Touch vs. Low-Touch Onboarding

There are two main schools of thought when it comes to onboarding: low-touch and high-touch. Low-touch onboarding is a simple, largely automated, process. High-touch onboarding is in-depth and offers live, personal, support.

High-Touch

When a team member, project manager, customer success manager, or any other dedicated personnel from your company helps the client run through onboarding, this is known as a high-touch approach. In these approaches, almost everything about the onboarding process is customized and personal to the individual clients from the initial kickoff call, support emails, and any account modifications.

Low-Touch

On the other end of the spectrum, there is low-touch onboarding. This is an almost entirely automated process in which a client onboarding checklist is built into your software to take an individual through the process of making an account and experiencing an initial tutorial. Often low-touch will also rely on chatbots in lieu of a support team to keep personal client contact to a minimum.

Which One is Better?

While there is a place in SaaS for both methods, which one is “better” remains a heavily contested topic.

Some companies believe that low-touch onboarding should solely be reserved for new start-ups who don’t have the power for a support team. Others believe that the personalized contact in high-touch onboarding complicates the process and will turn people away.

In reality, most companies find a happy medium by using a blended approach. How much of each style you use is really a matter of trial, error, and careful attention to the services your clients use most.

Looking at two examples, we can see the different uses of low vs. high-touch onboarding:

Example 1: Low-Touch

Let’s say that you are looking to market a simple SaaS product that helps people organize their bookmarks on the internet. The software has few advanced features and is something you want your audience to be able to use right away.

Here, signing up with an email and running through a short automated tutorial is often all you need. As such, having a low-touch onboarding process is going to create the least amount of friction. It will help your clients get up and running, perhaps even with a promotional free trial, with minimal barriers, steps, and annoyances.

Example 2: High-Touch

Now let’s say you are looking to market a task management system that has the capacity to integrate several other products or services from your company. This system allows for several employee accounts, document management, scheduling, and many other advanced features. This technology is free for 30 days to allow everyone time for the full experience— maybe even to reach an “aha” moment where users see the full value of your product.

Here, you most definitely want a high-touch process. Not only will you initially need onboard administrators, but you will need the sysport system to navigate employee onboarding, multiple accounts, and potentially an entire suite of softwares each with their own purpose. The more complicated the services, the more need for personalized tech support and consumer relationship management.

When you put these ideas into practice, knowing your audience gives you valuable information about how to craft your onboarding experience. To see how this works in action, let’s look at two examples.

Testing Your Process

No matter which style or combination you implement, it’s important to look at the type of churn created by your system.

Churn rate is the silent killer of many SaaS companies. This is because there is a high percentage of clients who churn who will never give feedback as to why your software didn’t work for them.

Missing out on valuable information such as this could be detrimental to your company. Sometimes, all it takes is a simple poll asking for feedback to determine whether the problem was your product itself, or an onboarding system that missed the mark.

In either case, the information gathered will be of great use to the long-term success of your SaaS business.

The SaaS Experts Who Also Do Funding

This is where we talk about how RevTek Capital can help you on this incredible journey.

RevTek helps businesses grow. We do this by providing Capital in exchange for a percentage of your future revenue. In the world of SaaS where upfront costs can put a real strain on lead generation, that added financial help can be the difference between a small growth spurt and truly amazing results.

Can the added help get your business where you want it to go? Give us a call at 480.332.0399 to find out.

How Much Money Should a SaaS Company Raise?

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The reality for many SaaS entrepreneurs is that the cost to begin a software company is simply too much for any one individual to amass. As such, while we all love a good “rags to riches” story about a tech entrepreneur who bootstrapped their way to success, it’s not a realistic goal for a vast majority of SaaS companies.

This begs the question: how much money do I actually need to raise to take my growth to the next level. Depending on where you are at in the lifespan of your business, this number can look a little different for everyone.

As SaaS financing experts, read below for the funding stages you may encounter on your way up the ladder, how much money to raise for a startup, and furthermore, how to get the funds.

What Investors are Looking For

There is a difference between marketing to an investor and marketing to a client.

While clients are looking for your product to resolve their pain points, they are also far more susceptible to good sales copy– emotionally driven passages, promises of a better tomorrow, and the like.

For investors who come into contact with thousands of different companies each year, their eyes are primed for something a little different.

The main concern for investors is knowing your product ains, whether your audience is B2C or B2B SaaS, the amount of money you may need, and what kind of growth your funding may earn over the next 12 to 18 months and beyond. These are the two top contenders an investor will consider when making the final decision about whether your business might be profitable in the long term, or whether your idea needs more work.

As such, you want to make sure your proposals are direct. Tell them what you do, how you do it, and where you want to see yourself in the future.

The different Stages of Investing

What level of funding your SaaS needs will depend largely on how established you are, what your prospective goals are, and what series of funding you are looking to receive. This is particularly true for SaaS Startups, as the spending curve for software companies are often much steeper in the beginning of a company’s inception when compared to their financial needs vs revenue at a later time. This is due to the business model and growth rates of SaaS companies relying heavily on returning revenue (such as monthly subscriptions) to remain sustainable and profitable, rather than many other products or services which are on-time purchases.

Pre-Seed

If you need pre-seed money, you are at the earliest stage of your fundraising journey. Most likely, our company is still forming, your revenue growth is not secure, and you are looking to raise money to get past this early stage of your business.

While having a business model is a great way to solicit your company, understand that at this stage, funding will likely come from friends, family, and your own pockets.

Seed

Raising funds for “seed money” is the point in your business where you begin to take your growth more seriously. Think of this phase as the foundation to building up your business in a way that starts to make an impact.

Generally, investing at this stage of the game is risky for individuals. As such, it is much more common to run into angel investors who are less risk averse than more traditional investors (such as private equity companies or banks).

Raising capital at this stage could be difficult for an SaaS company as this is the most financially intensive period in a tech startups life. This is the point before you have subscribers, recurring revenue, and a proven niche you know how to reach and convert.

Depending on your goals, you may find yourself asking for millions of dollars to help cover the initial cost of getting your business running, conducting outreach, and getting your name on the map.

Series A, B, and C

Some companies will never need more than seed money to get off the ground and get profitable. However, it’s good to know that on the other side of these investments, there are broader horizons.

For companies looking to scale in a big way, potentially grow their product offerings, or even begin acquiring smaller companies that offer similar services, going up the ranks in series funding might be for you.

Like with other types of funding, you will likely be asking for an amount in the millions depending on what you are looking to accomplish. The difference here, however, is that as your company grows more profitable, you will be seen as a safer investment. This opens the doors to more traditional investment opportunities such as capital investors and banks, all of who might be able to provide you with the financial services you need to take your business to another level.

Before you Take on Debt, Ask yourself This

Taking on an investment loan might seem like the only way forward in the earlier stages of your company, but remember: not every kind of loan is right for every kind of company.

You must make a careful assessment of your own goals and prospects before engaging an investor, not only to keep your investors happy, but to ensure your business grows in the direction you imagine.

Here is the thing: when you are accepting investments, there are going to be strings attached. Your investors are not just giving away money, they are seeking an opportunity for their own gain. This usually means part ownership of the company, some involvement in decision making, and oftentimes certain requirements and stipulations you have to agree to before receiving financing. While this works for some, not everyone wants a business that has several cooks in the kitchen, so to speak.

The decision is intensely personal and only you can decide what is right for you. That being said, if you decide not to use external funding, you growth process will likely be slower and your prospects smaller.

SaaS Funding Experts

Many times what gets in the way of a SaaS company reaching their full growth potential is not having the funds to function at that initial negative profit while leads and sales are being discovered.

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, contact us at (480) 332-0399 to schedule an appointment.

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.

What You Should Know About Debt Financing

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Whether you are a small, family-owned business or a large corporation, you will likely need an outside injection of capital to increase your cash flow. One of the most common ways to obtain that capital is with debt financing. So, what is debt financing?

The Basics of Debt Financing

Debt financing is where a business borrows money from another entity that they will later repay. In exchange for providing a line of credit, the lender will require payments on the principal — also known as the original amount — in addition to interest on the debt.

There are different ways that a business owner can obtain debt financing. On one hand, a larger business may be able to issue bonds to obtain the capital they need. More commonly, however, a bank or a similar entity will provide a business loan with specific terms, conditions on repaying the loan, and a designated interest rate.

Usually, debt financing is either used to make an acquisition or to finance general business expenses. Depending on the current market and the borrower’s credit rating, debt financing can be costly. The amount of interest paid throughout the duration of the loan is the cost of debt financing.

That cost is dependent on the interest rates, which change with the size of the loan. Generally speaking, a smaller loan translates to higher interest rates.

However, smaller interest rates on a larger loan still translates to more profit for the lender. Because of the larger overall reward, they are willing to charge less on annual interest.

What’s the Difference Between a Secured and Unsecured Loan?

There are two primary types of loans: secured and unsecured. An unsecured loan does not have any assets or security attached to it. As a result, an unsecured loan is riskier for the lender, which translates to higher interest rates. The most common type of unsecured loan is a credit card.

On the other hand, a secured loan has an asset or security attached to it. In the event that the debtor has a deficit in their balance sheet and cannot repay the debt, the lender can take hold of the asset.

A mortgage is an easy example of a secured loan because the lender can repossess the house if the lender doesn’t make their payments.

What Can Be Used for Security?

Lenders don’t restrict the security you provide for a secured loan to a physical asset. For businesses, there are a variety of securities you can put forward to obtain a secured loan and to receive a better interest rate as well.

  • Guarantors: There are different options in this category, but in all of them someone contractually agrees to assume your debt if you default and can’t pay it. 
  • Accounts receivable: This isn’t actually a tangible asset, but it is a commonly used security for businesses. Accounts receivable refers to the amount of money that customers or debtors currently owe you.  
  • Chattel mortgage: This is essentially the equivalent of a mortgage or car payment, where some tangible asset — such as equipment — is mortgaged to the borrower. The difference is that the borrower already owns the equipment and borrows against the value of the equipment. 
  • Real estate: Whether commercial or residential, most lenders will take about 90% of the value of your property as collateral. 

What’s the Difference Between Debt and Equity Financing? 

As you look to finance your business, there are several different financing models, especially for startups. One of the most common alternatives to debt that almost all businesses end up using is equity financing.

Whereas debt financing requires the borrower to repay the loan, equity financing involves the borrower giving up stock or ownership in their company in exchange for capital.

Most companies choose to implement both of these models to obtain the capital they need. There are different ideas about the exact debt to equity ratio a business should aim for, but most experts agree that a low debt to equity ratio is best.

Advantages and Disadvantages of Debt Financing

Debt financing can be extremely helpful, but it is not always the best option for you and your business. The most obvious con is the interest payments — whether to a bond holder or the bank that is providing the line of credit.

As previously mentioned, the monthly and overall impact of this interest varies depending on the amount of the loan. Regardless of the amount, all of the interest payments are tax deductible, which is a great benefit.

The main benefit to debt financing, however, is that you don’t have to give up any control or ownership in your business. Giving up shares in your company can cause conflict and prevent you from running the company the way you see fit.

What Does RevTek Offer?

We know that obtaining capital with favorable terms for your business can be difficult, if not impossible. That’s where our team at RevTek comes in.

Instead of getting stuck with rigid fixed debt payments or giving up ownership in your company, we offer flexible financing solutions that work for you. Revenue-based financing is the perfect solution for technology companies that generate most of their revenue from subscriptions. 
If you are looking to obtain growth capital or move into a new market, contact us today.

What is Debt Financing?

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According to the U.S. Small Business Administration, newer businesses access capital from many different sources. More than 70% will use personal savings or another form of self-funding, while other sources include business loans, credit cards, venture capital, grants, and more. Debt financing is a traditional means of obtaining capital by borrowing with a repayment agreement. Roughly 87% of small business owners report they use some type of debt financing.

Understanding Debt Financing

Firms of all sizes often need funds for working capital and expenditures. To finance these operations, businesses often turn to two primary financing models: debt financing and equity financing, which involves giving up some ownership and control in a company in exchange for capital.

In debt financing, borrowers receive investment capital with the condition that they will repay the principal — the amount borrowed — and interest to compensate the lender.

Loans associated with debt financing may be secured or unsecured. A secured loan involves some form of collateral that provides some security for the lender. If the borrower is unable to repay the loan amount, the lender may use the collateral to recoup losses. One example is a mortgage loan where the lender uses the home as collateral. There are other types of securities that also reduce the risk for the lender.

More commonly, however, unsecured loans have no assets attached to them. A credit card is a perfect example of an unsecured loan.

Loan Guarantors

A loan guarantor is a third-party that contractually assumes the obligation to “guarantee” the repayment of a loan in the event that the borrower can’t. A newer small business will often have an insufficient credit history to satisfy the lender. In this situation, a credible guarantor will improve the borrower’s ability to obtain capital.

A cosigner is a guarantor who is needed to obtain approval for a loan. A cosigner is different from a co-borrower, but both are assuming the risk. A co-borrower has some shared interest along with the primary borrower, while a cosigner does not enter the agreement with the intentions of making the payments to satisfy the debt.

Understanding Equity Financing

An alternative to debt financing is equity financing, which involves issuing lenders some ownership of the business. Corporate entities often do this by issuing shares of stock. The lender providing an equity investment hope to see their share of ownership increase in value over time as the company grows.

One drawback from the owner’s perspective is they may be relinquishing some control to lenders that have an ownership interest. Companies that rely heavily on equity financing may have less flexibility to independently make moderate to large business decisions. There may be approval processes put in place such as when potentially adding employees or contracting with vendors.

Although this may seem like a very undesirable situation, the majority of large companies will require equity financing to fund their operations.

Debt Financing Through a Bank

Those who do not wish to surrender any management control to a lender often favor bank loans. Bankers do establish relationships with those they finance, but they are less likely to seek decision-making control in the business. Borrowers seeking financing may consider looking into several options from different banks to compare.

Repayment Periods

The repayment arrangement of a loan tends to be classified into one of three potential categories:

  • Short term: These are generally in the range of six to 18 months
  • Intermediate-term: Typically a range of one to three years
  • Long term: Any period that exceeds three years 

Other Potential Securities:

When obtaining loans for your business, lenders will often require you to provide collateral. There are a variety of assets that you can set up for security for your loans.

  • Invoices: A company’s accounts receivable are generally considered as viable. This includes any invoices that the company is awaiting payment on. Lenders advance approximately 60 to 80% of the value of accounts receivable.
  • Equipment: In what is called a chattel mortgage, a lender will view a company’s equipment, such as items used in manufacturing or production, as collateral. You can expect the collateral to equal roughly 60% of the equipment’s value 
  • Inventory: This usually equals approximately 50% of the value of products that are in-stock and available for sale. 
  • Real estate: Lenders generally view 90% of the value of the real estate as collateral.

Considerations When Choosing a Lender

A company that is seeking financing may place considerable emphasis on the speed in which lender can complete the process. This is particularly important when you are looking for a quick loan.

When looking to obtain capital fast, many business-owners consider using a credit card. A potential drawback is that credit cards may charge higher interest rates. The longer that you will need to pay the debt back, the more interest you will have to pay.

What is Tax Deductible?  

For tax purposes, debt financing loans are viewed as tax-deductible business expenses. The interest that you accrue will generally reduce your tax liability. This applies as long as the funds are used exclusively for business purposes. To be eligible for tax deductions, there must be a written, legal obligation that exists to repay the debt.

Working Capital

Most often a company seeks financing for the purpose of boosting its working capital, which is calculated by subtracting the company’s liabilities from its assets. Most business experts and investors consider working capital a good indicator of the financial strength of a business. A ratio of 2:1 between assets and liabilities is generally viewed as being strong, but this may not apply to all industries.

Often those who lack working capital will experience problems with cash flow. Timeliness is a significant factor when it comes to working capital. For instance, cash flow problems can arise if you have a slow-paying customer and expenses such as payroll or loan payments.

Debt to Equity Ratio

A potential lender will also likely want to calculate what your debt to equity ratio is. This is important for determining the financial strength of a company. Companies that are burdened by considerable debt will likely encounter difficulties in obtaining further credit.

Established Provider of Growth Capital Solutions

RevTek Capital is a lender offering emerging businesses revenue-based financing to support their growth. We partner with dynamic technology companies in various industries to assist them with obtaining the working capital they need.  For additional information, please visit our site or contact us at (480) 332-0399.

Benefits and Risks of Debt Financing

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When a company needs capital for a major purchase or expansion, it may pay choose to pay cash. In the more likely scenario, however, the company will consider financing options, such as debt.

One common way for companies to finance a purchase is through debt financing, which has many benefits and risks. In debt financing, a company receives a loan that they make a commitment to repay with some conditions, such as set monthly payments and an interest rate.

There are two primary types of debt financing: a secured or unsecured loan. A secured loan is one where the borrower provides something of value to serve as collateral. An example would be a home mortgage. Here, lenders can recoup losses by retaking possession of the property if the loan is not paid back.

With an unsecured loan, the lender does not have any collateral to repossess in the event that the borrower fails to make their payments. As a result, the interest rates are usually higher. A credit card is a prime example of an unsecured loan.

In debt financing, the borrower must repay the borrower he principal and interest. The principal is the amount borrowed, while interest is a percentage added to compensate the lender.

Another type of lending is known as equity lending where the lender receives stock or fractional ownership of the business.

Repayment Terms in Financing

Short-Term LoanTypically less than one year
Intermediate-Term LoanGenerally, have a one to a three-year term
Long-Term LoanA three to twenty-year period may be long term

Keep in mind that these terms for loans are estimated ranges. All lenders recognize that loans involve risk. The term of a loan generally impacts the amount the lender is willing to loan and the amount of interest they will require.

A short-term loan is often for a smaller dollar amount but has a higher rate of interest. A long-term loan may be for a larger amount and have a lower rate of interest.

Despite having a potentially lower interest rate, a long-term loan accrues interest over a significantly longer period. A long-term loan is more commonly used to fund large capital purchases for an organization.

Types of Debt Financing

When borrowing from an institution like a bank, it is relatively easy to compare conditions from different lenders. Debt financing does not always involve a traditional lender such as a bank, however. Some start-up companies or small businesses may seek to borrow from friends, family, or other private sources. In these less formal arrangements, the parties should put the agreement in writing.

A bond involves a loan from an individual investor to a company that has a definite term and interest rate. One variation of a bond is a debenture. A debenture is an “unsecured loan certificate” that is based on the credit history or trustworthiness of the borrower.

Benefits of Debt Financing

There are a host of benefits of debt financing. For one, the borrower still maintains full ownership of the business, unlike other arrangements that allow lenders to obtain leadership positions and influence decision-making.

Debt financing inherently reinforces the temporary nature of the relationship between the borrower and lender. Once the debt has been repaid according to the contract, the relationship concludes.

A major benefit is the predictability associated with debt financing. The provisions of the loan clearly define the term of the loan and the interest rate. This makes it easy for the borrower to accurately forecast and manage this aspect of their cash flow. Additionally, interest paid on this type of loan is usually tax-deductible.

Risks of Debt Financing   

For borrowers, one of the main drawbacks is that lenders are likely to have some eligibility requirements. The lender may require a borrower to have a strong credit history, which means many startup companies are unlikely to obtain approval.

While it can be an advantage, the fixed payment schedule of debt financing can be challenging for a company with inconsistent cash flow. Another disadvantage of debt financing is that failing to make a loan payment by a specific date will almost always result in late fees and penalties.

The lender may require that a borrower — especially a startup with minimal credit — to provide collateral in order to qualify for a loan. But those same new businesses may not have acquired any assets that are sufficient to satisfy the requirements of the lender. The borrower may find themselves using personal assets as collateral, which often exposes their families to risk.

Common Types of Collateral

  • Real estate: Property is a common form of collateral. Real estate, often with a house or building included, is generally seen as among the most stable types of assets, as long as the owner has sufficient equity. 
  • Inventory: Tangible items owned by the company may be used as collateral. Lenders are likely to only lend a percentage of what the total stated value of inventory is.
  • Accounts receivable: This involves invoices that have been issued that are awaiting payment.

Collateral vs Securities       

Collateral is typically a tangible asset, such as a home or vehicle. On the other hand, security is something of value that exists in financial markets, such as bonds or stocks. The lender assumes control of the security during the loan period.

Lenders generally view securities as a riskier option because the value of securities could potentially plummet.

An organization’s credit rating or history is often a major consideration in potential financing agreements. On one hand, a borrower with a minimal credit history and no debt may be considered as healthy. More commonly, the lender would view the company’s insufficient track record of borrowing money and repaying those obligations as a red flag.

Lenders often will consider the ratio of a company’s existing debt compared to income or equity. Companies with significant debt relative to their cash or assets may be considered as “highly leveraged” based on its equity ratio. 

Provider of Alternative Solutions for Growth Capital  

Revtek Capital is an established lender that offers business owners revenue-based financing that supports their growth. Based in Arizona, we partner with dynamic technology companies in various industries seeking working capital. For more information, we invite you to visit our site or contact our office at (480) 332-0399.

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 underperforms 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.

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.

Debt vs. Equity Financing Pros and Cons

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Whether you are a startup company looking to get off the ground, or an established business looking to push to new heights, you will need outside capital. Without an injection of capital, you likely will not be able to expand your company. For most businesses, there are two primary ways of obtaining this capital: debt and equity. Let’s explore debt vs. equity financing and the pros and cons of each.

Debt Financing

In terms of obtaining capital, debt financing is what people generally think of. This involves an entity such as a bank, a government, or another business, providing capital that will be repaid with interest. Debt financing encapsulates business credit cards, business loans from the government, and bank loans.

Debt financing has some significant advantages:

  • Maintain sole ownership of your business: This is arguably the most significant benefit of debt financing. You will probably have to offer some form of collateral, but you will not have to give up any control or ownership.
  • Keep future profits: When you grow your business, the accounts receivable to the bank does not increase. Regardless of your business’ growth, your debt will only increase based on the interest rate.
  • Flexibility: Another important aspect of debt financing is the flexibility it provides you. Once you obtain the line of credit or the loan, there aren’t restrictions concerning what you can spend the money on. This allows you to use the money as growth capital on whatever you see fit.

While these advantages are important, there are also some important disadvantages to consider.  

  • Requires profitability: This is true for all options outside of personal credit cards. Banks and the government do not want to assume any risk in financing small businesses, so businesses that have yet to prove profitable usually cannot obtain these types of loans.  
  • Complicated process: The process of obtaining a loan from the bank or government is extremely time-consuming because of the significant vetting involved. Once you obtain the money, the loan repayment plan can be confusing as well.  

Equity Financing

While debt financing involves receiving capital that will be paid back later, equity financing is when a company receives capital in exchange for equity (or ownership) in their company. With this arrangement, you do not have to pay the money back, since the payment is partial ownership. Depending on the needs of the company and requirements of the investors, a company can give up a small portion of their equity or all of their equity in a single transaction.

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. Angel investors and venture capitalists are the primary sources of equity financing.

Here are some of the most noteworthy advantages of equity financing:

  • Significant capital: Compared to bank loans, equity financing can raise significantly more money for your business to use. This is particularly true for venture capital, where a group of investors collectively partners with your business. Having that increased cash flow allows you to expand to create even more capital.
  • Risk: Most equity financing providers are not concerned with current profitability. Instead, they are interested in the potential for your business plan to produce long-term profits. As a result, venture capitalists and private equity companies seek out young companies with significant potential, which also presents significant risk.
  • Liability: Because venture capitalists are taking at least partial ownership in your company, you are no longer completely responsible in the case that your business fails. As WealthForge puts it, one “advantage of equity financing is that the investor assumes all the risk.”

However, equity financing also has some cons that you need to consider before pursuing it.

  • Lose equity: This is a rather obvious drawback of equity financing, as the whole premise is to give up some equity to receive capital. Even though it is obvious, it’s worth mentioning again. Once you give up all of your equity, it becomes difficult to obtain additional financing further down the line.
  • Lose control: Private equity firms and other equity investors typically provide some mentorship, which is helpful. However, most of these groups will put someone on your board and want a voice in your company. When you and the firm have different ideas about the direction and practices of your company, you may experience a significant conflict. Your vision may no longer direct the company.

What Does Revtek Capital Offer?

At RevTek Capital, we understand the complications and challenges that come with borrowing money. Whether it be a bank loan or another source, every type of loan has its drawbacks. That’s why we’ve simplified the process for small tech businesses with recurring revenue.  

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.