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Not all debt is restrictive – A smart alternative for subscription companies
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re:cap is an innovative funding solution with all the advantages of debt capital and without the disadvantages of equity financing.
Convert up to 60% of your ARR into instant upfront cash and complement your capital stack.
Easy investment of future revenues from subscription business models for sustainable cash flow optimization.
Whenever an external finance provider steps in as a creditor or lender and provides a company with external capital at an interest rate, this is referred to as debt financing. Classically, this is a loan that is repaid in a fixed period of time, plus interest - the money therefore only remains in the company for a limited amount of time.
Debt financing is an attractive model that allows founders to extend their runway without losing ownership rights and profits. Interest is also tax deductible.
The disadvantages sometimes include very high interest rates. There is also a real risk of over-indebtedness if companies use too much debt capital and the economic situation develops in an unplanned manner. In addition, some debt capital is earmarked for a specific purpose, and repayment is inflexibly tied to a fixed deadline. And finally, not all companies are eligible to receive debt capital.
Warrants are another disadvantage: Through subscription rights or entitlement certificates, lenders often acquire rights to purchase new shares in the financed company - this increases costs and intensifies dilution.
It depends on the goals if debt financing is helpful. In general, debt capital is more suitable for short-term financial injections and to reduce the tax burden. Outside capital can also be beneficial for startups because equity capital is usually low. However, interest rates are higher in the case of poor creditworthiness.
Founders should therefore look for special subsidies and alternative debt financing solutions such as recurring revenue financing from re:cap.
Companies can use equity solutions such as self-financing via retained earnings, equity investments, factoring, or leasing as an alternative to debt financing.
Increasingly popular is non-restrictive and non-dilutive revenue financing. If you have a subscription business model, re:cap's innovative solution is just right because it works flexibly with recurring revenue.
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Secure up to 60% of your ARR as instant upfront capital.
There is a big difference between equity and debt financing. If the investment is more sustainable, equity solutions often come into focus. However, founders usually give up shares, give investors parts of the profits, and ultimately give them a (partial) say in the company.
Many use the terms internal and external financing synonymously with equity and debt financing because, by definition, the following applies:
- Internal: financing through company revenues.
- External: financing by external capital providers.
However, this conceptual equivalence does not always apply. For example, accruals in the balance sheet are regarded as external financing, even though they come from within the company. The same applies to financing from restructuring and depreciation.
Companies often opt for an individual financing plan consisting of equity and debt. But there are also alternative solutions like recurring revenue financing, which should not be missing in any portfolio nowadays.
Recurring revenue financing provides upfront access to future revenues, more vital KPIs, and better valuation - perfect for the next financing round.
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Alternative to restrictive debt and dilutive equity financing.
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In debt financing, companies receive a certain amount of money from an external investor. The company holds the debt capital for a limited period and must be repaid - usually with interest and within a fixed time duration.
Debt capital includes typical liabilities of a company, such as loans, bonds, and provisions, as well as unique forms like deferred income.
There are various types of debt financing, which can basically be divided into short-term and long-term debt. Unique and mixed forms are also possible - examples:
- Short-term: overdraft, trade credit, acceptance credit
- Long-term: promissory note loans, bonds, long-term bank loans
- Special form: leasing, factoring, asset-backed securities
- Mixed form: mezzanine as a mix of equity and debt financing
Short-term debt capital is provided to companies for a short period of time - repayment usually takes place within a few months. Such capital is primarily used to meet short-term liquidity needs.
Long-term debt capital is provided to companies for a longer period of time - repayment usually occurs within several years. The capital is used for investments.
From the perspective of the capital providers, it is primarily a question of liability because, in the case of equity financing, capital providers are liable for entrepreneurial activities. In return, they usually receive a share and benefit directly from the profits. Because founders relinquish shares and entrepreneurial control, this is referred to as a dilutive type of financing. This is not the case with debt financing, which involves interest and is generally more restrictive.
Recurring revenue financing is an alternative to debt and equity. At its core, it is closer to debt financing, but it reduces the disadvantages, such as inflexible repayments and bundles the advantages - especially the non-dilutive nature.
