You may be wondering “what the heck is recurring OR recurring-like revenue and what’s the point of making the distinction?” At Sage Growth Capital, this distinction is very important as it’s what allowed us to bring revenue finance to industries outside of strictly SaaS.
Let’s first explore the concept of revenue-based financing and the definition of recurring revenue. After that, I will share how we evolved the model of revenue finance to include “recurring-like” revenue streams; a critical innovation that has allowed us to fund companies in many industries with varying business models.
Where did revenue finance come from and why is recurring revenue so important?
Revenue finance, also referred to as revenue-based financing or sometimes royalty-based financing, was born out of a Harvard Business School case study that was seeking alternative ways to finance start up businesses other than equity. It really took off as a source of capital specific to SaaS businesses because of their subscription-based business models. Today, most revenue financiers are still only funding SaaS businesses because of the pre-conceived notion that revenue finance only works with recurring revenue. So what is “recurring revenue”?
Recurring revenue refers to income that a company earns regularly and predictably, typically over a specified time period, such as monthly or annually. This type of revenue is often generated from ongoing customer relationships and subscription-based or contractual agreements. It provides a stable and consistent revenue stream, which helps businesses forecast financial performance and manage resources more effectively.
Examples of recurring revenue models include:
Subscription Services: Revenue from memberships, such as streaming platforms (Netflix, Spotify) or software-as-a-service (SaaS) providers (Microsoft 365, Salesforce).
Maintenance or Retainer Contracts: Revenue from ongoing service agreements, such as IT support, consulting retainers, or equipment maintenance contracts.
Rental or Leasing Agreements: Revenue from recurring payments for leased equipment, property, or vehicles.
Usage-Based Models: Predictable revenue from regular usage patterns, such as utility bills or cloud storage services with tiered pricing.
The advantage of recurring revenue is its predictability, which helps companies achieve long-term financial stability and scalability.
Revenue finance can take many forms, but it needs that level of predictability to be able to model out the investment and deal terms (repayment amount, payment schedule, maturity, etc.).
Enter Sage Growth Capital: Definition of Recurring-like Revenue
Make no mistake: we love recurring revenue at Sage. However, we observed that there are a lot of healthy US businesses that have steady revenue streams and aren’t necessarily using any of the recurring revenue models mentioned above, yet could still benefit from revenue finance.
Sage was willing to look beyond the traditional SaaS business to companies with strong customer relationships and contracts that are continually re-ordering from them. The way we think about recurring-like revenue is: how often does that same customer come back and purchase from you again? If it is every month, every quarter or every year then we consider your revenue as recurring-like.
Sometimes it is easier to define recurring-like revenue by discussing the type of revenue that we won’t fund. Revenue that is lumpy or one-time, often referred to as “elephant hunting” would fit into this category. These are the businesses that do one large project with a customer and then move on to find their next customer with that customer never really doing business with them again or very little business. These purchases don’t have to be large. It could be a consumer goods product that you will only purchase once in a lifetime or once every couple of years, such as a car or a refrigerator.
By expanding our definition of recurring revenue, we are able to fund other industries that traditional revenue based financing firms won’t consider such as: food and beverage, industrial products, consumer products, and manufacturing.
A New Path Forward for Entrepreneurs
The benefits of revenue finance give entrepreneurs the ability to grow their businesses and valuations without giving up ownership for themselves or their existing shareholders, to access capital quickly, and to have flexible payment structures that match their business cycles. Revenue finance doesn’t require businesses to be profitable (unlike traditional business loans) so it adds a new tool that entrepreneurs can consider in their overall capital strategy to continue growing their business.
This is why we at Sage challenged the definition of recurring revenue and brought this new, innovative form of finance for any company in any industry that meets our criteria to utilize. Contrary to popular belief, there isn’t only one path entrepreneurs must take to reach a successful exit event and we are happy that we have brought a new form of capital to the market for savvy entrepreneurs who want to preserve their ownership as much as possible, yet not succumb to predatory cash providers such as Merchant Cash Advances.
Feel free to reach out to us if you are interested to learn more and discuss how to take advantage of it for your business.
About Sage Growth Capital
Sage Growth Capital makes revenue-financed investments in companies at any stage who need growth capital. It is our mission to provide a more flexible funding option to growing companies who do not fit traditional equity or lending models. To learn more about Sage Growth Capital or to apply for funding visit: www.sagegrowthcapital.com.
About Revenue-Financed Capital
Revenue-financed capital (RFC), also referred to as royalty financing, revenue share or revenue-based financing (RBF), is a non-dilutive form of growth capital where investors receive a percentage of monthly revenues until a set amount has been paid. RFC differs from equity financing as the investor does not obtain ownership of the company and it differs from debt financing as there is no collateral required and payments are variable. RFC is designed to empower entrepreneurs to grow their businesses with non-dilutive capital that aligns with their sales cycles.