Traditionally, SaaS companies have offered two types of subscription, annual or monthly, and this crucial choice has inevitably had an impact on their cash flow and ability to grow. But now, thanks to alternative financing and RBF, this periodic trade-off has become a thing of the past.
SaaS, “Software as a Service”, is booming, and the advent of remote working coupled with the harmonization of IT architectures within companies should accelerate this trend. As proof of this, 40% of software publishers' investments will already be in SaaS in the second half of 2020 (Syntec Numérique study).
Despite the popularity of the flexibility of the model, many SaaS companies are mired in the cash flow gap: a time lag between the point when they need to make investments and the point they receive the funds from customer subscriptions.
A wide range of SaaS companies restricted in their development
Behind the great success of SaaS lies a well-known difficulty for entrepreneurs in the sector: the choice of subscription model, monthly or annual. For the service provider, this is a highly important decision, since the option of the ARR (annual recurring revenue) approach allows it to obtain upfront payments from its customers - and thus relieve its cash flow to continue investing. On the other hand, with the MRR (monthly recurring revenue) approach, subscriptions, without commitment, are invoiced monthly, which brings in regular but reduced sums, hence the infamous cash flow gap.
So why don't all SaaS companies choose to sell annual subscriptions?
For the simple reason that not all of them can do it! It is less a question of will than of business model. ARR is very rare in B2C, and is not suitable for VSMEs/SMEs either, whose means and needs rarely justify the choice of a significant annual payment. Furthermore, the ARR approach also assumes that your product has critical technical features, and that these are advised and marketed by additional human resources. Again, this is not the case with all so-called SaaS solutions.
RBF for SaaS companies
Don't panic if you can't offer annual subscriptions! Revenue-Based Financing (RBF) is probably for you. This innovative financing method is designed to allow SaaS companies to accelerate their growth without having to worry about successfully raising equity or getting a traditional banking partner to agree to a loan.
RBF enables the company to transform its monthly subscriptions into immediate cash flow for 60% of its contracts. In addition to its non-dilutive nature and its speed of execution (release of funds within 24 hours), RBF is highly regarded for its flexibility: repayments are adjusted according to the revenue attained.
This cash advance can be decisive for SaaS.
Take for example the preservation of the churn rate, one of the main concerns of the business. With strong finances, SaaS companies can pamper their monthly customers and provide quality after-sales service. At the same time, they can invest their added value, the product or software, in what’s left, and build up their sales and marketing teams to gain new market share. RBF is also very effective in preventing SaaS companies from selling off their services – sometimes offering discounts of over 30% – in order to convert their monthly customers into annual customers.
In short, RBF optimizes the company's ARR and its valuation, and enables it to continue to grow at a sustained rate. And that’s the goal!