An Easy Guide To Revenue-Based Financing

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April 19, 2022 Business

Whether you are running an established business or have just started your business venture, one thing every business requires is the right financing. Without capital to invest, considering a business loan might be a feasible option. However, borrowing funds can become daunting due to strict requirements and repayment schedules, especially for new business startups. Fortunately, revenue-based financing is a flexible option for aspiring entrepreneurs who want to inject cash into their business and get the ball rolling.

Revenue-based financing allows a business to work on its terms, ultimately leading to better financial growth. We have compiled a simple guide so you can get familiar with this method of funding your business to gain more control, experience less pressure, and achieve the best outcomes.

Understanding Revenue-based Financing

Revenue-based financing or RBF is considered a better alternative to debt financing. When opting for RBF, business owners can raise the required funds with ease as this type of financing does not require the company founder to provide collateral against the raised funds. Furthermore, the repayments are made every month and are valued as a percentage of the total monthly income.

Revenue-based financiers are the ones who approve the loan after evaluating the growth of the business. These financiers might ask for access to data like statistics on your marketing campaigns and the monthly revenue to anticipate the growth of your business and make funding decisions accordingly.

Revenue-based Financing Process

Let’s say you are the founder of a small logistics company and believe you can grow your operations and expand the business that will require capital to invest. However, you don’t have enough savings to put in as an investment and are not comfortable getting regular loans due to their strict requirements, considering revenue-based financing would be the most beneficial way to move forward. After an evaluation by the financier, you will be awarded a principal amount which you can use of your own will to grow your company. The money you receive will be paid off as monthly installments equal to a percentage of your total monthly revenue. You will not be paying interest but a fixed amount more than the lent money.

The cost at which you receive the financing depends on the nature of your company, the projected growth, and the risk level. Businesses and companies with a potential to grow will have to deal with a lower overall cost when compared to businesses lacking a growth potential. The duration of the financing can also vary depending on the loan agreement you made with the financier. It can either be a fixed-term agreement where you repay according to the agreed terms within a specific period or go for a flexible agreement where you pay according to your actual business growth without any restrictions.

Evaluating Revenue-based Financing Options

Determine how the loan you take could affect the growth of your business. You can apply the 33% rule to be on the safe side. The total debt you take should always be less than 33% of the total revenue. A debt of more than 33% could lead to issues like cash availability. Furthermore, consider how you would be repaid as the money you pay will be from your future earnings. Make sure the repayment process can be managed without facing issues. To be on the safe side, UK-based financing firm Fund Squire explains that some financiers can ask for a warrant that gives them the right to buy the company’s equity for an agreed price. Besides evaluating the above-mentioned aspects, dedicate time to research and find a trustworthy financier to achieve the best results. Furthermore, compare the total cost, and the payment terms, and ask about any hidden charges to make an informed decision.

Advantages of Revenue-based Financing

Equity Dilution

Loan options like venture capital or angel investing can provide you the required capital for investment but it demands equity dilution. On the other hand, revenue-based financing requires limited equity dilution which does not affect the way you conduct your business or the equity.

Being in Control

Most venture capitalists not only invest their money but are also keen to take key positions in the business that allows them to steer the company’s direction towards growth. Unlike venture capitalists overseeing every decision, revenue-based financing firms let business owners make critical decisions for themselves as they believe true growth is possible only when founders get to create their own vision.

Easy Repayments

With increasing saturation in every industry, it is becoming hard for startups to sustain their growth. Due to the volatile nature of startups in terms of growth and revenue generation, paying back fixed monthly payments might not be feasible for every business owner. When you sign an agreement for revenue-based financing, you only need to pay a small percentage of your total monthly revenue as repayment for the agreed time.

Easy Approval

When applying for bank loans, buying a new car or getting a pre-mortgage approval might require giving the lender some sort of guarantee. Revenue-based financing works completely differently and does not require the business owner to provide any sort of guarantee. RBF loans are easy to get and save you from the hassle of pledging a property or an asset.

Overall Growth

The venture capitalist approach of improving the revenue at all costs can sometimes destabilize the workflow and coordination within the business. The revenue might increase by many folds but the customer satisfaction and suggestions are completely ignored which affects the brand identity and the company’s reputation. RBF firms aim to keep the investors, entrepreneurs, and founders on the same page which ultimately improves the growth of the business.

Now that we have covered the basics and briefly explained how revenue-based financing can assist you in growing your business, the next step would be to look for a financier. As there are a plethora of revenue-based financing options available, do your homework and compare each service, their terms for repayment, and most importantly, your business requirements so your organization benefits from the process.