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Debt financing and new alternatives

Not all debt is restrictive – A smart alternative for subscription companies

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Alternative debt financing

re:cap is an innovative funding solution with all the advantages of debt capital and without the disadvantages of equity financing.

Fair and immediately available

Convert up to 50% of your ARR into instant upfront cash and complement your capital stack.

Smart revenue financing

Easy investment of future revenues from subscription business models for sustainable cash flow optimization.

Debt financing: definition

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: pros and cons

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.

When is debt financing useful?

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.

Debt financing: alternatives

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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Define a target volume or trade subscription contracts for immediate capital.

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Secure up to 50% of your ARR as instant upfront capital.

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With re:cap you optimize your cash flow sustainably.
With re:cap you invest recurring revenue without restrictions.
With re:cap you keep control of your business vision – and equity.

Equity versus debt 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.

What does internal and external financing mean?

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.

Alternative debt capital with re:cap

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.

With re:cap, we were able to get non-dilutive funding at an early stage which is great for every startup founder. The whole process was simple and fast, and we look forward to a long-term partnership in building Meisterwerk.

Bertram Wildenauer,
CEO and Co-Founder, Meisterwerk

While validating funding options to accelerate our growth we came across re:cap’s financing line and quickly realized it’s exactly what we needed: full flexibility and full control at attractive conditions. The process was transparent and fast (days, not months) which allowed us to focus on our core business.

Artur Hasselbach
CFO, Talentsconnect

re:cap has enabled us to get access to funding in an incredibly fast and transparent process. Also, I really like the business insights dashboard which helps us to understand and improve our funding terms. I would recommend every founder to look into re:cap as a financing partner.

Tobias Hagenau
CEO and Co-Founder, awork

For us as a company with recurring revenues from offering both hardware and software-as-a-service, re:cap's financing option is a great tool for cash flow management. In addition to that, the financing process was quick and uncomplicated.

Frederik Merz
CBDO and Co-Founder, ampere.cloud

Having re:cap as a financing partner has allowed us to grow faster without endangering our cash. We are using the funds to cover sales commissions and are excited to use re:cap in the future to grow flexibly in other areas too.

Dirk Brockmeyer
Executive Partner, Tabtool

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Alternative to restrictive debt and dilutive equity financing.

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FAQs

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What does debt financing mean?

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.

What does debt capital include?

Debt capital includes typical liabilities of a company, such as loans, bonds, and provisions, as well as unique forms like deferred income.

What are examples of debt financing?

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

What is short-term debt capital?

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.

What is long-term debt?

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.

What is the difference between equity and debt financing?

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.

Does recurring revenue financing work with debt?

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.