Revenue based Financing: What is it?
September 11 2021 | By James Garcia
Many high growth companies are now opting for revenue-based financing (RBF) instead of approaching venture funds or angel investors. If you are wondering what the fuss is about, here is a low down:
What is revenue-based financing?
Revenue-based financing is a model for raising funds based on the ongoing revenues of the company. Simply put, a company can pledge a part of its annual revenues in return for growth capital. Typically, early-stage ventures and even SMEs prefer revenue-based finance as they can get access to funds without any form of collateral or equity dilution. It is considered to be a good source of capital raising for the businesses as it is fast, non-dilutive and doesn’t impose any binding constraints on Business.
How does revenue-based financing work?
There are companies like RevEx (Revenue Exchange) that specialize 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 flat 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 customer. The customer commits to sharing a part of the business revenue with the RBF company. In other words, both the principal and the fee that the RBF company charges, is returned from the revenues that the company earns during the normal course of the business.
What are the advantages of revenue-based financing?
The advantages are manifold. The biggest advantage is that promoters/Founders of these companies do not need to dilute any stake or bring any collateral even while getting access to the much-required funds. This is just not possible when raising funds from angel investors or venture capital firms. Incidentally, this also ensures that promoters continue to enjoy complete freedom in managing the affairs of the company. Typically, entities like private equity or VCs insist on a board seat and are known to interfere in the way businesses are managed in their investee companies. Secondly, revenue-based financing can be helpful to ventures that cannot get bank funding due to lack of collateral or profitability or any other reason that could act as a hindrance.
How is revenue-based financing picking up?
RBF as a segment is growing very fast at an annual growth rate of 62%. TThe growing popularity can be gauged from the fact that the last 5-6 months have seen nearly 100s of revenue-based financing deals in USA. The ticket size could be as low as $10 Thousand while going up to $100 Million depending on the specifics of the deal.
“EXchange your Future REVenue with upfront cash. We are founders ourselves and understand the pain-points that our fellow founders have to deal with and that’s why we launched RevEx to fix this funding problem,” said Amit Munjal, Co-Founder & CEO, RevEx.
“We charge a low flat fee for the funding and the client returns the principal and the fee through a customized Revenue Share Arrangement. It is an excellent avenue for emerging businesses especially SMEs in e-Commerce and SaaS segments. Revenue-based financing may be looked upon as an alternate source of funding today but it is only a matter of time before it goes mainstream,” said Munjal.