Understanding ARR SQUARED’s Subscription-Based Financing (SBF)

Over the past few years, alternative financing options have emerged for SaaS companies, outside traditional equity and venture debt. With more than 95% of SaaS companies having never raised venture capital or not appropriate for venture capital, these new alternative financing options have created optionality for founders seeking to to limit dilution, extend runway to reach a value target / milestone, or simply operate a bootstrapped and profitable SaaS business.

Revenue-based financing (RBF), a flexible debt instrument that is repaid by the lender taking a percentage of the borrower’s revenue (typically 4–8%), has quickly become a popular way for early stage companies to raise capital while limiting dilution . However, RBF comes at a very high cost of capital compared to traditional venture debt. Additionally, the cost of capital increases if the company is growing faster as capital is repaid over a shorter period of time. Over the past year, subscription-based financing (SBF) has emerged as an alternate source of capital and is especially suited to SaaS businesses or other recurring revenue businesses.

In this article, I am taking a look at some of the key benefits of ARR Squared’s SBF product, a new form of non-dilutive growth funding designed for SaaS or other subscription-based businesses. ARR Squared provides SaaS companies with simple and speedy access to non-dilutive growth capital by trading their monthly subscriptions.

This is best explained with an example:

• SaaS Analytics Co, an Australian-based spend analytics platform for software, is on track to report a $150K in MRR and with the company’s latest product update, they are expected to achieve 8–10% net new MRR growth per month
• Whilst top line revenue and customer acquisition costs are increasing, cash is lagging as only 35% of SaaS Analytics Co’s enterprise clients pay their subscriptions on a monthly basis
• To drive top line growth and increase cash flow, the median discount the company provides to enterprise clients is 21% which is lowering net cash vs. booked MRR
• The founders of SaaS Analytics Co, Elon and Sheryl, anticipate stronger sales in the US market where they recently launched
• They need funding to address this new sales opportunity but have no need for a large VC round. Additionally, Elon and Sheryl are sensitive about dilution
• The founders are looking for non-equity funding options and are evaluating a funding offer from a RBF provider and from ARR Squared.

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RBF Offer

SaaS Analytics Co borrows $540,000, with a repayment cap at 1.4x (or $756,000). With a revenue share of 6%, i.e. the company pays 6% of its gross revenue each month until the total of $756,000 has been paid. Payments vary depending on how SaaS Analytics Co performs. In this scenario, SaaS Analytics Co would pay $18,000 towards the loan in a month where it has $300,000 in revenue. If it has a stronger month and generates $475,000 in revenue, it would pay $28,500. The company’s average monthly payments to the RBF provider is $29,076 over 26 months.

The main benefit of this RBF proposal for SaaS Analytics Co is that payment obligation varies, depending on the company’s ability to pay and starts lower but steadily increases as the MRR grows. If the loan is paid off early because SaaS Analytics Co’s revenue exceeds projections, the implied interest paid to the RBF could be much higher. With RBF providers you are negotiating on multiple levels, i.e. available capital, total repayment, term, and take-rate, which could take time to negotiate.

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ARR Squared Offer

SaaS Analytics Co syncs its subscription management and accounting software to the ARR Squared platform. In a few minutes, ARR Squared assesses SaaS Analytics Co’s key SaaS metrics and generates a discount rate to ACV, which is typically lower than the discounts the company will typically offer for annual upfront payments. SaaS Analytics Co selects a list of subscriptions equivalent to $600,000 of ACV and receives $540,000 in cash upfront, based on a 10% discount to ACV. With SBF, capital is repaid in 12 equal instalments of $50,000. ARR Squared’s discount to ACV of 10% is agreed upfront , is the only term to be negotiated, and remains fixed during the tenure of the funding agreement and could be lower for subsequent trades. Additionally, with real-time access to SaaS Analytics Co’ s subscription management and accounting systems, ARR Squared can underwrite within minutes, making it fast and convenient for Elon and Sheryl to access and receive the funds as they are needed. As SaaS Analytics Co. onboards new clients and grows, ARR Squared can provide additional funding and extend SaaS Analytics Co’s runway.

ARR SQUARED appropriate for companies with $50,000 of MRR growing at least 4–6% per month and for those who believe they have achieved product-market fit and stability in their customer acquisition costs. We operate in Singapore, Australia, and the US.

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