Publication
29 Sep 2023 ·
United Kingdom
Finance
3 min read
But before this, as a business shifts to the subscription economy, additional finance may be required – for example, to cover disruption to cashflow, or for capex required for the new business model, or to deal with the costs involved in retaining and leasing assets rather than selling them.
New models of financing
Shifting to a subscription model may in turn suggest new models of financing, such as embedded finance, revenue-based lending and even crowdfunding.
Embedded finance
Embedded finance is the provision of financial products – such as payments, lending and insurance – by non-financial institutions in a non-financial customer journey. Subscription providers are well-placed to offer their subscribers embedded finance products such as digital wallets, instant payments and buy-now-pay-later solutions.
Oracle estimates the worldwide embedded finance market will be worth more than $7tn in the next 10 years. As well as boosting subscription providers, this presents significant partnering opportunities for banks and tech providers.
Revenue-based lending
Revenue-based lending (RBL) is particularly suitable for subscription businesses with recurring revenues. A principal amount is advanced, unsecured, with no conventional maturity date. Instead, the lender receives regular repayments in an amount equal to a share of the borrower’s revenue.
Crowdfunding
An option frequently used by start-ups and early stage businesses, can integrate effectively with subscription models – especially for consumer-focused start-ups, which may be able to offer investors the incentive of non-cash benefits related to their subscriptions. In a similar way, subscribers may be offered the chance to invest in an IPO or other equity issue – sometimes with priority access or on preferential terms.
In a similar way, subscribers may be offered the chance to invest in an IPO or other equity issue – sometimes with priority access or on preferential terms.
M&A
The subscription model is appealing to a variety of investors, buyers and entrepreneurs (see Acquisition & investment).
As in all M&A, the structure and financing of a transaction involving a subscription business depends on considerations specific to the individual deal. However, it is worth noting that the subscription model – thanks to the relatively high degree of predictability and transparency it brings to turnover – can lend itself particularly well to financial instruments such as earn-outs.
International
A subscription model may introduce additional layers of complexity for businesses which develop international offerings.
The provision of cross-border subscription services will require a range of tax issues to be addressed, including determining the location of the subscriber for tax purposes, and establishing the local parameters of taxable services. Handling these badly can land a business with a substantial tax demand.
Where financial or other regulated services or products are offered to subscribers, these will also need to meet local requirements, however secondary they may be to the subscription service itself.
