The global revenue-based financing market size is projected to reach over $42MM by 2027.
And why not? Recurring Revenue Financing (RRF) is, after all, a compelling alternative for businesses looking to secure quick growth capital without the drawbacks of traditional financing. Traditional financing comes with equity dilution, loss of decision-making power, or debt accumulation.
However, success in leveraging a RRF financial strategy hinges on several critical factors, including: customer retention rates, market conditions, and adequate use of funds. Perhaps the most crucial of all is the choice of your recurring revenue financing partner.
A suboptimal partnership in this regard can not only hinder your ability to capitalize on the benefits of RRF but also subject your business to unwarranted financial pressure and stress, ultimately defeating the very purpose for which you pursued it.
In this article, we outline six red flags to watch for when choosing an RRF partner and discuss why Ratio is a leading choice for your business.
Six Red Flags While Evaluating RRF Partners
Selecting the right RRF partner can bring invaluable benefits beyond just capital, such as guidance and growth opportunities. Conversely, a mismatched partnership can lead to unnecessary challenges and setbacks - constraints on the use and amount of capital, greater cost of financing or hidden fees, technical glitches in the app, etc.
Here are six red flags to watch for to ensure a prosperous relationship with your RRF partner:
- Opaque terms and conditions
- Unusually high financing fees or unfavorable terms
- Refusal to shoulder underwriting risk
- Inflexible payment terms
- Poor track record and aggressive sales tactics
- Lack of industry knowledge
Opaque Terms and Conditions
It is a significant red flag if your RRF partner is not transparent about their terms, conditions, and fees.
A Recurring Revenue Financing deal involves many intricate details related to the repayment structure, interest rates, underwriting risk, default resolution mechanisms, etc.
A transparent RRF partner provides a clear understanding of all the financial terms of the agreement, including any hidden fees, potential penalties, or other unforeseen costs. This clarity is essential for businesses to make informed decisions regarding their financial obligations.
Lack of transparency can conceal potential risks and catch businesses off-guard, leading to cash flow strains, strategic misalignment, default on payments, and other financial distress.
Trustworthy partners allow you to identify and address these risks proactively.
Unusually High Financing Fees or Unfavorable Terms
It's important to be vigilant about financing fees and terms. If the fixed fee, revenue share percentage, or discount appears excessively high relative to industry norms, this can be a warning sign. While the numbers are usually governed by the associated financing risk, the industry standard is 4-8%.
For example, if a contract is worth $1 million and the discount rate set by the RRF partner is 5%, the seller will receive $950,000 upfront. However, the buyer is still obligated to pay the full $1 million over the agreed-upon duration. Essentially, the seller gets slightly less due to the discount, while the buyer pays the contract's original value.
While the cost of financing can vary based on various other factors, unusually high discount rates or fixed fees can expose the business to liquidity problems and limit the funds available for essential growth activities.
They might also indicate that the partner is taking advantage of businesses or is financially unstable. Ideally, it is recommended to go for a partner with access to huge capital, which places no restrictions on the number of contracts the seller can offer for financing.
Refusal to Shoulder Underwriting Risk
Recurring Revenue Financing (RRF) partners who shirk the responsibility of underwriting risk can pose significant threats to businesses.
Underwriting is a crucial process where the financing partner assesses a business's financial health, risk profile, and revenue stability before extending capital.
When RRF partners neglect this due diligence and take on buyers with a high risk of default, they endanger the seller company's financial stability, growth potential, and overall well-being.
By bearing the underwriting risk, RRF partners can not only prevent their sellers from losing deals but also help them increase their customer retention rates, ensuring business growth over time.
Inflexible Payment Terms
Recurring Revenue Financing is also an instrument to offer BNPL (Buy Now Pay Later) or the ease of subscription-based payments by sellers (especially SaaS businesses) to the buyers.
However, SaaS businesses' current approach of one-size-fits-all often doesn't align with customers' specific needs, which can dissuade customers from purchasing.
For instance, a customer might be reluctant to pay $10,000 monthly for a year but could be more receptive to paying $8,000 monthly over 1.5 years.
To accommodate the unique needs of buyers, sellers need their RRF partners to offer immense flexibility at the point of sale. The absence of such flexibility should be considered as a sign of warning.
Poor Track Record and Aggressive Sales Tactics
Taking the time to thoroughly investigate the reputation and track record of potential RRF (Recurring Revenue Financing) partners can provide you with valuable insights into their performance and reliability.
One way to do this is by scrutinizing reviews and testimonials from other businesses that have engaged with them. Firsthand feedback from these sources can offer a clear picture of their past collaborations.
Additionally, checking for any public records of complaints, disputes, or lawsuits related to their operations is advisable. Identifying a pattern of dissatisfaction or unethical behavior should be seen as a sign to reconsider the partnership.
It would also help to exercise caution when dealing with RRF partners who seem overly eager to rush you through decision-making or employ high-pressure sales tactics.
Such behavior may indicate a focus on short-term gains rather than fostering a mutually beneficial, long-term relationship.
Lack of Industry Knowledge
A lack of industry knowledge in an RRF partner can lead to misaligned financing solutions, inadequate risk assessment, and suboptimal strategic guidance. This disconnect may result in missed growth opportunities and financial and operational business challenges.
Imagine a pharmaceutical company partnering with an RRF firm specialized in tech. The financing terms they receive might need to account for the strict regulatory demands and extended research and development cycles unique to the pharmaceutical sector.
As a result, the pharmaceutical company could experience delays in obtaining drug approvals, lose out on opportunities to introduce new medications to the market and suffer significant revenue losses due to the prolonged development and compliance processes.
An RRF partner well-versed in your industry can prevent such a catastrophe by creating financing solutions that align precisely with your business needs. They can better understand the specific capital requirements, seasonal variations, growth opportunities characteristic of your sector, and the unique risks associated with your business.
They can better evaluate the creditworthiness of your customers, foresee potential market fluctuations, and adapt repayment terms accordingly. This approach minimizes the risk of financial surprises and defaults.
Industry-savvy RRF partners can also expedite the underwriting and approval processes and make more accurate assessments, allowing businesses to access capital when they need it most.
Ratio - Your Perfect Recurring Revenue Financing Partner?
Choosing a RRF partner for your business isn't a decision to be taken lightly.
It's like choosing the right travel buddy for a cross-country road trip – you want someone who understands your quirks, adapts to your pace, and, most importantly, has your back when you hit the inevitable bumps in the road.
It obviously helps if your travel partner is also well-equipped with the routes to get you to your destination faster and with less hassles. That’s Ratio for you!
Boasting a team of experienced SaaS entrepreneurs and finance executives who understand the ins and outs of the game, Ratio makes it easier for businesses to realize their growth objectives with its innovative approach to financing.
Here are some compelling reasons that make Ratio the perfect RRF partner for your business:
- Ratio has over $400 million of capital for customer financing.
- Unlike venture funding, Ratio provides quick access to growth capital without equity dilution or loss of control.
- Sellers get to choose which contracts to sell based on their needs.
- There is no upper limit on the number of offers sellers can place.
- Effortless integration with your systems for swift approval and onboarding
- Approval or rejection of submission within 48 hours.
- Payment Flexibility to customers with Ratio Boost.
- Proper security and privacy mechanisms are in place. Network traffic encryption using TLS v1.3 through RSA-2048
The right financing partner can play a crucial role in your business's success, so it’s worth seeking the financial advice you need and doing your due diligence before finding your best fit.
Registering to Ratio’s app to see if the company meets your requirements could be a good first step!
