Whether you’re a solopreneur or have an established team, having additional capital to invest in business growth will always put you steps ahead of the competition. More importantly, choosing the right funding option makes all the difference when it comes to enabling said growth. To effectively evaluate funding options, be sure to have a clear vision of your goals and map key milestones to each. From there, assess the pros and cons of each funding option to see which best aligns with your growth goals.
Most businesses consider raising capital through equity, debt, or a blend of both — depending on where they are at in their growth journey. There is also a third option that businesses should consider: revenue-based funding (RBF). We’ll highlight the pros and cons of all three, characteristics that make each a good fit depending on needs, and dig a little into how RBF funding works.
And if you’re ready to put your funding to work, check out our latest eBook with App Growth Network: 4 Steps to Supercharge User Acquisition.
Equity financing involves selling a portion of company ownership in exchange for funds, a process that can take months or years. Equity investors absorb more risk than any other type of investor, which often means the cost of capital is much higher for the company. However, the main benefit is that there is no repayment obligation.
This is a good fit for businesses focused on one or all of the below:
✅ Early stage product development and/or optimization
✅ Early stage marketing (running marketing experiments to learn what drives traction)
✅ Building predictive revenue models
Debt financing is a loan that is repaid with interest. This option is not ideal for growing businesses because they absorb all the risk. It often requires guarantees that put business and personal assets at risk if there is a payment default. Monthly payments on the principal and interest must be made regardless of revenue. The benefits are that interest paid is tax-deductible and company ownership is preserved.
This is a good fit for businesses that:
✅ Have established a predictive revenue model
✅ Are using capital for a short-term goal (6-12 months)
✅ Are not concerned about committing to a recurring repayment schedule that may impose limitations on cash flow
RBF combines elements of both equity and debt financing, but also removes blockers that come with traditional funding options to better enable growth with capital that scales with a business. Business owners keep their equity and maintain control of carrying out their company vision. The threat of liens are avoided because personal guarantees are not required. The strain on cash flow from dips in revenue coupled with monthly interest payments is never a concern.
These differences, plus the cost and repayment of capital make RBF the least risky funding option for growing businesses. The cost is typically a fixed fee and repayment is taken as a percentage of future earnings, so a business never has to extend beyond what they are able to pay.
This is a good fit for businesses that:
✅ Have gained traction (a minimum of ~$10,000+/month in revenue)
✅ Are focused on building enterprise value
✅ Want funding that can scale with their business (i.e., maintain equity; no additional costs, like interest, that don’t align with revenue actuals)
The amount of capital that can be secured is based on current and predicted revenue. There are three ways to leverage current revenue traction to secure RBF:
Option 1: Advance Subscription Renewal Earnings
The subscription economy has seen a massive boom, and the race to dominate has made for a very competitive landscape. The value of a subscription app is defined by retention. It starts with an optimized experience that captures enough interest to convert customers from a freemium user to paid. Both freemium and paid experiences require a regular output of quality content that drive retention by maximizing value.
- 👉 Read more on Subscription Pricing Best Practices
Naturally, subscribers will drop off, but it can be minimized. It’s important to stay close to retention performance by tracking when users lose interest and understanding why.
With RBF, founders can collect the cash from future subscription renewals to accelerate investments in improving retention rates.
Option #2: User Acquisition Funding
Imagine what doubling or tripling monthly UA spend could do for your business — and what if you could compound that growth? RBF models can look at UA performance to provide one-to-two times the amount invested in UA in the previous month.
- 👉 Get more out of your funding: 4 Steps to Supercharge User Acquisition
As the added investment in UA generates more revenue, eligibility for higher funding amounts increases. This can be a significant growth multiplier for businesses that have tested and identified predictable UA strategies.
Option #3: Advance App Store Earnings
App store payment schedules can be a major growth blocker. If your app is in the Apple App Store, sales cycles are four-to-five weeks (highlighted in blue) and actual earnings are paid (highlighted in yellow) around 33 to 67 days later.
From day one of the sales cycle, June 27, the September 2 payday is 67 days, while the last day of sales, July 31, is 33 days.
The payout schedule varies, and usually there is zero payment activity during one calendar month within Apple’s fiscal quarter (e.g., August in the chart above).
- 👉 See Apple Payment Calendar for your next payday.
On this schedule, the amount invested in marketing has to stay behind current actual revenue, unless a business is willing to reallocate budget from other areas to match growth trends.
The fix for this is to close the gap between sales and payment cycles. Another RBF option allows a business to advance app store and ad network earnings so that the previous week’s revenue is in your bank account the following week. Instead of waiting a month or two to collect revenue, the added cash flow creates more flexibility and consistency that enables better growth investments.