Compared to more traditional equity-based investments (like venture capital or angel investment) and debt financing, revenue-based financing (RBF) is a relatively recent option. The repayments are made as a percentage of the monthly income, and revenue-based funding loans (RBF) enable entrepreneurs to raise money without diluting stock. As a result, your company will always have enough cash on hand to cover its marketing and inventory demands. For small firms seeking scale without eroding equity, it is perfect for D2C start-ups.

Characteristics of Revenue-Based Financing

How does Revenue-Based Financing work?

There are firms that specialise in revenue-based financing. To start with, these companies look at parameters like revenues, cash flows, operating margins, scalability and growth potential among other things as part of their due diligence. Once convinced with the potential borrower’s prospects, they lend the required capital at a mutually decided rate of interest or fee. Interestingly, this is quite similar to how an angel investor or even a VC would function, but what makes revenue-based financing different is the manner in which the funds are repaid by the borrower. The borrower commits to sharing a part of the business revenue with the lender. In other words, both the principal and the fee or interest that the lender charges, is returned from the revenues that the company earns during the normal course of the business.

6 Steps to Get Revenue-Based Financing to Start a Business

  1. Know The Reason And Amount for the Revenue-Based Financing
  2. Decide the Type Of Structure You Need  
  3. Compare Financing Firms 
  4. Check Your Qualifications 
  5. Gather the Necessary Documents 
  6. Apply For RBF 

Pros of Revenue-Based Financing

1. Cheaper than Equity

With expectations for 10X-20X returns, Angel and VC funding are the most expensive sources of capital possible if your startup is successful. 

2. Retain more Ownership & Control

When it comes to revenue-based financing (RBF), investors generally do not take equity. As a result, there is no ownership dilution to founders and early equity investors. In addition, RBF investors do not take board seats or place difficult financial covenants on a company. Founders are able to maintain control and direct the company towards their vision.

3. No Personal Guarantees

Bank loans require personal guarantees from founders based on the high-risk nature of startups. This requires founders to put their personal assets, such as a house or car, on the line. Founders can breathe easier under RBF knowing that no personal guarantees are required.

4. No Large Payments

Monthly payments are based on a percentage of your monthly revenue. This means if you experience a bad month, your monthly payment will reflect that and you are not burdened with a large payment you can’t afford. 

5. Faster Funding Timeline

Pitching to venture capitalists can take anywhere from months to years before securing a deal. Since RBF investors do not require companies to achieve hyper-growth or large equity exits, lenders can provide funding in as little as four weeks. 

Cons of Revenue-Based Financing

1. Revenue Required

Because this form of financing is revenue-based, pre-revenue startups are generally not a fit. A revenue-based investor uses metrics such as MRR/ARR and growth projections to determine eligibility for a loan. 

2. Smaller Check Sizes than VCs

Venture Capital is known for shoveling out enormous amounts of cash for companies, even if they are pre-revenue. Investors in RBF deals will not provide capital that is worth more than 3 to 4 months of a company’s MRR. However, RBF investors may choose to provide follow-on rounds as a company grow, providing entrepreneurs access to more capital over time.

3. Required Monthly Payments

RBF requires monthly payments unlike equity financing. Startups may find themselves tight on cash, so it is crucial to take on a healthy amount of revenue-based financing that aligns with the company’s financial status and plans.  

Why Revenue Based Financing?

Revenue Based Financers in India



Leave a Reply

Your email address will not be published. Required fields are marked *