Revenue-based financing

Revenue-based financing enables you to fund your business’s growth — while keeping all the equity.

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What is revenue-based financing?

Revenue-based financing (RBF) refers to a means of raising funds, where investors provide capital, in return for a stipulated percentage of a company’s ongoing total revenue.

The amount to be repaid fluctuates with the borrower’s financial performance — going up when revenue increases and going down when it decreases.

Revenue-based financing can be seen as an alternative form of finance — that operates on a different model to traditional equity-based investments, like angel investing and venture capital.

Revenue-based financing is also known as revenue-based funding, royalty-based financing, royalty financing and a revenue loan.

Revenue-based financing — considerations

The revenue-based financing model has its roots in the oil industry. It was used by oil investors to finance oil and gas exploration. The model was then later applied to both the pharmaceutical and movie industries (Hollywood).

The use of RBF has risen considerably in other sectors — specifically the technology or tech sector. For example, companies involved in software, SaaS, tech services, digital media and more.

With revenue-based financing companies get business capital — in exchange for a percentage of the company’s future monthly revenues. The financing firm gets to claim their share of revenue — up until the business’s total debt is repaid in full.

Any money lent is not repaid with interest, instead repayments are calculated based on a certain multiple (or cap) — that ensures that any returns are higher than what was initially invested.

RBF allows companies to retain ownership and full control. Depending on the lender, personal guarantees or “seats on the board” are not always required. Application processes also tend to be quick — enabling lending decisions to be made quickly.

Businesses do not necessarily have to be profitable to receive funding — although they typically do have to be generating some sort of revenue. Where not profitable, a clear path to profitability will need to be shown.

How does revenue-based financing work?

Your company may seek revenue-based financing — when you are unable to obtain a bank loan, are unwilling to dilute your equity, or simply because you feel the RBF model is suitable for your business.

To apply, you would need to seek an appropriate financing firm — that specializes in revenue-based financing. The financer will need to evaluate your whole business model. It will need details of your trading history, key management staff, statement of accounts, cash flow statements etc.

If your business meets the requirements, the lender may agree to advance you a particular sum of money — in return for a portion of your future revenues. Anywhere from 3% to 10% of your total gross revenue, may be required.

Monies can be advanced all at once — like with an unsecured term loan. Alternatively, the money may be released as and when required — similar in a way to a line of credit. Allowing you to draw down on the loan, as needed, is generally the cheaper option.

Repayments are made until a specific milestone is reached. Milestones may be the lender receiving a pre-determined multiple of the original loan, or simply when a terminal date is reached.

Benefits of revenue-based funding

  • It is non-dilutive i.e. does not require equity
  • Lenders do not get involved in governance or business operations
  • Personal guarantees are usually not needed
  • Collateral is normally not required
  • There is no minimum monthly payments
  • Longer repayment terms
  • Company does not need to be valued
  • Simple due diligence process
  • Highly flexible funding solution
  • Less restricted covenants (than banks)

Limitations of revenue-based funding

  • Must be generating revenue already
  • Business will need to have healthy profit margins — to accommodate loan repayments
  • Can be more expensive than an asset-based loan — due to risk
  • No pre-payment incentives
  • May require an equity warrant
  • Only certain types of companies (fast-growing) are eligible

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