A few years ago, founders had only two options when starting a business: start up yourself or turn to VC money, and they would primarily use that money to pursue growth. Later, risk debts began to gain prominence. While non-dilutive, the issues are similar to those of venture capital: it takes time to secure, warrants are needed, it’s not very flexible, and not every startup can get it.
But in recent years, more options have become available to founders. Most startups can now leverage non-dilutive capital and target-specific funding has entered the fray.
While venture capital remains the most popular avenue for startups, founders should take advantage of all the financing options available to them. Using an optimal combination of capital sources means using cost-effective, short-term financing for imminent goals and more expensive long-term money for activities with uncertain returns on the horizon.
What is Income-Based Financing?
Let’s define it as capital provided based on future earnings.
While venture capital remains the most popular avenue for startups, founders should take advantage of all the financing options available to them.
So what’s so unique about revenue-based financing? First, it is quick to increase. Compared to the months-long process usually associated with other forms of equity or debt financing, income-based financing can be set up in days or even hours. It’s also flexible, meaning you don’t have to withdraw all the capital up front and opt to take it in instalments and wager it over time.
Income-based financing also scales as your credit availability increases. Usually there is only one simple fee with fixed monthly repayments.
How should startups develop their funding playbook?
To optimize fundraising using different sources of capital, startups need to think about aligning short-term and long-term activities with short-term and long-term sources of funds. Income-based financing has a shorter maturity and a typical maturity ranges from 12 to 24 months. Venture capital and venture capital are longer-term sources of capital, with a typical maturity of two to four years.
A startup’s short-term activities can include marketing, sales, implementation, and associated costs. If a startup knows its economics, CAC and LTV, it can predict how much revenue it will generate if it invests a certain amount in growth. Because the returns from these activities can exceed the cost of revenue-based financing, startups must use revenue-based financing to fund initiatives that will soon pay off.