On December 23rd, 2022, G2 launched its new Recurring Revenue Finance category, which falls under the Accounting & Finance parent category. G2 created this category to represent a more recent, evolved way for high-growth start-up SaaS companies to borrow money without losing a stake (equity or ownership) in their company.

Maximizing growth while still retaining ownership of the company with recurring revenue finance software

Recurring revenue finance (RRF) software, sometimes referred to as programmatic financing, facilitates short-term loans, usually one to two years, to high-growth start-up SaaS and e-commerce companies with annual recurring revenue (ARR). A company will typically sync its banking, accounting, and payments systems to the RRF software, which analyzes the data, and provides a loan amount and either an interest rate or a percentage of future subscription fees that will be paid to the lender. Start-ups find these types of loans attractive because they don’t have to give up equity in their own company, they can access their funds as needed, and as the company grows, the potential loan amount can grow with it.    

What a typical RRF software dashboard might look like

Source: capchase.com

For a company to be eligible for a recurring revenue loan, they usually have to meet certain criteria thresholds created by the lender. This can include a minimum monthly and annual recurring revenue dollar amount, a customer retention rate above a certain percentage, and a month-over-month or year-over-year revenue growth minimum. Often, these funds are used for short-term growth expenditures, such as improving products and services, hiring new employees, marketing, and paying vendors early for greater discounts.

How does RRF differ from traditional funding?

Typically, funds are raised for young, fast-growing companies by selling a portion of the company (or equity–think Shark Tank) to internal or external investors. On the one hand, this is good for the owner because they can raise large amounts of funds to invest back in the company, but on the flip side, they are losing ownership in their own company, which could be worth a lot more in the future than the investor originally paid. However, this newer funding method allows owners to borrow money against their recurring revenue without losing a stake in the company. They spend more money upfront (future monthly subscription payments, interest rates, or other fees), hoping their un-diluted company ownership will pay off.

Recurring revenue finance should not be confused with venture capital management software, which helps VCs manage their investments and capitalization tables to break down a company's ownership percentages, equity dilution, and equity value in each investment round. Also, in addition to ownership in a company, venture capitalists often require oversight of a company by sitting on its board, while RRF loans don’t contain such constraints.

Recurring-revenue financing is a better fit for subscription businesses because they tend to work on flat rates and can grow at the same rate as subscription businesses. They can grow with a company, but only by increasing trading limits. 

Why is recurring revenue finance software important now?

SaaS companies are a popular business model for numerous industries because it can be cost effective while giving businesses more agility, security, simplicity, and user accessibility. Because of these benefits, which can shrink the barriers to entry for start-ups, companies that haven’t yet started seeing profits can still access capital for growth. 

Studies have also shown that even with recent inflation, market volatility, and the possibility of a recession, SaaS-based companies are more resilient than S&P 500 companies. In fact, they had 9% more revenue growth in the first half of 2022, further demonstrating the stability of the SaaS business model. As these companies continue to weather the economic storm and new entrants emerge, RRF software is a readily available non-diluting funding option to allow SaaS companies to grow rapidly. G2’s Recurring Revenue Finance category has 16 products (and growing) for you to check and see whether your start-up can benefit from this lending software. It’s available to companies of any size needing cash to fund maximum growth while maintaining original ownership.

Edited by Shanti S Nair