What is revenue based financing and how it can help your business
Let’s say you’re a start-up, lean, mean, ambitious, yet hungry. You need capital, you need funding — where do you start? Where do you go first? Traditionally, the go-to method has always been loans - debt and equity-based funding.
Nevertheless, those aren’t the best suited for some companies. There are other avenues. Avenues that avoid founders giving away equity or making personal guarantees.
In the last few years, one of the methods has really hit its stride — Revenue Based Financing.
Revenue Based Finance is a popular option right now if you’re in the market looking for investors. In this blog article, we’ll tell you what Revenue Based Finance is, how it works, and, more importantly, if it’s right for your business.
What is Revenue Based Finance?
Revenue Based Finance gives companies funding options, capital, in exchange for a percentage of their future earnings.
It’s like asking for a loan, only you don’t put any collateral, and you, right from the get-go sign a contract stating that the loan will be paid through the revenues your business makes.
Your loan, its cash-outs, and your advances are approved on the assumption that your company will be able to repay a certain percentage of the whole investment with their revenue every single month.
Let’s say, for example, you’re a young up-and-coming start-up, and your prospects and predictions state that your company will hit it big.
An investor will give you a loan based on an agreed payback, let’s say 6%, of your revenue per month.
Your loan is paid not on a fixed monthly bill, or quota, but based on what you make. Higher-revenue months will result in a larger monthly shell-out and shorter repayment term. And vice-versa.
A financial expert, a lender, will take a rather long and incredibly in-depth look at your numbers — financial history, big data, prospects, growth, etc, and determine your qualification for a Revenue Based Finance.
The great thing about this is that as a business you won’t need to present a pitch deck, or a detailed business plan, on the other hand, there’s very little paperwork. Instead, all decisions are based on your projected monthly revenue.
Lenders will contact your back-end systems to make their decision, and funding can be done within days not months.
How does Revenue Based Financing work?
If you’re interested in Revenue Based Finance, you’ll have to follow three easy steps.
- Sign up with an RBF provider
You’ll first have to contact and sign up with a revenue-based finance provider - we’ll include a small list at the end of this article. You’ll need to connect your business’ financial accounts to that provider and give them access to your sheets and financial history. The lender will, based on your history, project a forecast revenue and give you a loan based on this.
- Choose an Offer
Once your lender has made a forecast, they’ll give you a series of loan options. These include how much they are willing to give you in advance, and the terms. The provider will charge you a flat fee for the service if you decide to use one of their loans. And then you’ll be given a monthly-revenue share agreement.
Here’s an example.
Funding amount: $100.000
Monthly revenue-share: 6%.
Average Monthly revenue projected: $500,000.
Approximate repayment term: 3 months.
It’s important to understand that projections and approximate repayment terms have to be taken with a grain of salt. You could have a stellar month and end up paying the month in a week. Or you could have an abysmal quarter and end up paying the loan in a year.
You repay the loan based on a monthly percentage, which may fluctuate. The more you make, the quicker you’ll repay the loan.
How much Revenue Based Finance can you get?
It depends on your company and how much a lender is willing to give you. Most maximum loans amount to about 30% of the company’s annual recurring revenue (ARR).
Meanwhile, repayment fees are usually between 6 -12% — the difference lies in what you’re going to employ the loan for.
The Types of Revenue Based Finance
There are different types of Revenue Based Finance agreements, but these two are the commonest:Variable collection
This is the most iconic and popular — a company takes out a loan for an X amount and promises to repay it monthly based on their gross profits.Flat fee
A flat fee is a great option for early-stage companies. Instead of submitting yourself to a rate of 6 to 12%, you commit to pay a much lower percentage, say 1 to 3% for a much longer period — in many cases up to 5 years.
Who can benefit from Revenue Based Finance?
Most companies can benefit from Revenue Based Finance still the ones that can really supercharge their business model are
- Ecommerce businesses
- Companies with seasonal performance
- SaaS and subscription businesses
- Small start-ups.
Companies offering Revenue Based Finance
Revenue Based Financing companies in the United States
- Enduring Planet.
Revenue Based Financing companies in Europe
- Forward Advance
- Valarian Funds
- Liberis Group
- Ark Kapital
- 365 Business Fi
Revenue Based Financing companies in India
- N+1 capital
Revenue Based Financing companies in Singapore
Revenue Based Financing companies in Latin America
Revenue Based Financing companies in Australia