Looking for a way to raise capital without losing ownership of your business? Revenue-based financing could be the perfect solution for you.
Table of Content
- What Is Revenue-Based Financing?
- How Revenue-Based Financing Works
- Why Use Revenue-Based Financing Instead of Debt Financing
- Payments Tied to Business Performance
- Revenue-Based Financing vs. Equity Financing
- Comparison to Accounts Receivables-Based Financing
- Revenue-Based Financing and Revenue Bonds
- Types of Revenue-Based Finance
- Revenue-Based Financing in Action
- Pros and Cons of Revenue-Based Financing
- Top Revenue-Based Financing Companies in the US and Europe
- 7 Tips for Securing the Best Revenue-Based Financing Terms
- 4 Top Alternatives to Revenue-Based Financing Loans in November 2024
- How Much Revenue-Based Financing Can You Secure?
- Conclusion
What Is Revenue-Based Financing?
Revenue-based financing (RBF), also known as royalty-based financing, is a way for a company to raise capital from investors who, in return for their investment, receive a percentage of the company’s continuous gross revenues.
Investors who make a revenue-based financing investment get a regular share of the company’s profits up until a certain amount is paid. This predetermined amount usually amounts to three to five times the initial investment, which is a multiple of the principal.
How Revenue-Based Financing Works
There are three simple steps to using revenue-based financing:
1. Sign up with an RBF provider
- You must first register with a provider of revenue-based financing.
- You then link your company’s financial accounts, like Xero or Stripe.
- This allows the provider to review your company’s financial history and determine whether you are eligible.
- If your projected revenue is sufficiently high, you will be approved for an advance.
- You’ll typically receive a range of offers with different terms for repayment.
2. Choose an offer
The provider agrees to a monthly revenue share and charges a flat fee as part of the offer. Here’s an instance of how it may appear:
- Funding amount: $90,000
- Monthly revenue-share: %6
- Avg. Monthly revenue: $500,000
- Approx. repayment term: 3 months
3. Repay the advance
- A monthly revenue percentage that is subject to regular fluctuations is used to calculate repayments.
- By taking on more debt, a business can pay off debt more quickly.
- You will never pay more than you can afford because slow months will slow your repayment.
Why Use Revenue Based Financing Instead of Debt Financing
Businesses using debt funding models, such as loans, have a set repayment period over which they must repay a fixed amount of interest. There is a set monthly repayment amount that must be made in full each month, in contrast to revenue-based financing.
Startups are often required to provide a personal guarantee for loans if they are unable to fulfill the repayment terms. Other debt models, such as venture debt, have more detailed terms for repayment and what happens if payments aren’t made on time.
Even though debt financing can be a helpful strategy for obtaining a large cash injection, it can also carry a significant risk if your turnover is irregular or if the market is volatile.
A growing number of business owners are choosing revenue-based financing because it doesn’t require a lengthy lead time and doesn’t require years’ worth of financial statements or a personal guarantee.
Although a company that raises capital through revenue-based financing must make regular payments to repay an investor’s principal, there are several reasons why it differs from debt financing. There are no fixed payments or interest on an outstanding balance.
In conclusion, compared to conventional debt financing, revenue-based financing provides greater flexibility and lower risk.
Explore various debt relief options like revenue-based financing which offers flexibility
Payments Tied to Business Performance
Payments to investors are directly proportional to the firm’s performance. This is because payments vary according to the level of the company’s income. If sales fall off in one month, an investor’s royalty payment will be reduced. Similarly, if the following month’s sales increase, so will the investor’s payments.
Revenue-Based Financing vs. Equity Financing
Startups that want to get growth capital through equity financing have to give up some ownership to the lenders. This financing model entails less risk, but in exchange, founders and directors give up some ownership. Depending on the equity structure, you might no longer have a say in important choices. You lose access to a minimum amount of your future earnings in either situation.
Revenue-based financing, on the other hand, does not require founders to give up ownership of their company. Since the investor in revenue-based financing does not directly own a portion of the company, it varies from equity financing as well. For this reason, revenue-based financing is often seen as a cross between equity and debt financing. Therefore, equity financing isn’t a desirable choice for entrepreneurs hoping to generate steady income (via Facebook advertisements, for instance).
Comparison to Accounts Receivables-Based Financing
Revenue-based financing is similar to accounts receivables-based financing, which is a form of asset financing wherein a business arrangement finances by using its receivables, which are outstanding invoices or unpaid customer balances. The amount paid to the company is equivalent to an amount of the pledged receivables’ discounted value. The age of the receivables has a large influence on how much funding the company receives.
Revenue-Based Financing and Revenue Bonds
Although revenue-based financing and revenue bonds are two different financing methods with different technical characteristics, their cash flow patterns are similar.
Many municipal projects will issue revenue bonds to finance particular projects, like infrastructure, rather than general obligation (GO) bonds. One project that might be financed with revenue bonds is a toll road. With secured income produced by the project or asset, these projects pay off debt. Thus, the term revenue bond.
Revenue-based financing is most commonly used by small and medium-sized businesses that do not qualify for more traditional forms of funding. Transaction costs for revenue-based financing providers can be much higher than for traditional loans because they become business partners. A lot of venture capitalists are evolving their creative thinking in terms of revenue-based financing saas (Software-as-a-Service) businesses.
Types of Revenue-Based Finance
Revenue-based financing agreements are usually divided into two types:
Variable collection
Variable collection is one of the most popular types of revenue-based financing. Companies borrow a set amount of money, which they then pay back each month based on their gross profits.
Flat fee
The funding model with flat fees is not the same as the variable collection model. You agree to pay a fixed percentage of your future earnings each month for up to five years—typically at a rate of 1-3%—in exchange for this funding.
It’s a good option for some early-stage companies because monthly repayments are typically much lower than those in the variable collection model; however, if you grow and scale quickly, you’ll pay far more throughout the loan period.
Revenue-Based Financing in Action
For example, suppose you are given a $50,000 loan and you are required to repay the advance plus 10% of your monthly sales immediately.
When it comes to the variable collection, your repayments could resemble this:
- Month 1: $3,000 of the advance must be returned after $30,000 in sales.
- Month 2: Sales of $60,000 require you to repay $6,000 of the loan.
- Month 3: Sales of $15,000 mean you repay $1,500 of the loan.
This process continues until the loan is paid back in full. You won’t be struggling to pay back a loan that your company can no longer afford if your sales decline for a month or two.
However, if your income increases significantly in a given month, you will have to pay back a greater portion of the loan and a higher percentage. This shortens your repayment period considerably.
Pros and Cons of Revenue-Based Financing
Pros
Revenue-based financing allows entrepreneurs to retain ownership and control of their businesses, resulting in better exit outcomes. RBF is a good funding option for a wide range of startups at various stages of development. Revenue-based financing SaaS startups that struggle to meet traditional bank loan funding requirements due to their business models benefit greatly from revenue-based financing.
If the lender is reputable and the loan and its terms fit the startup’s objectives and financial status, it can be a good fit for them. Among these advantages are:
- Non-dilutive funding; ownership remains intact
- Quick and objective funding approval
- No need for valuations, pitch decks, or presentations
- No personal guarantees are required as collateral
- Profitability is not a requirement
- Full control over how funds are used
- Freedom to decide growth pace and exit timing
- Flexible payments based on revenue
- Funding matches revenue for manageable repayment
- Scalable funding as the business grows
Cons
Is revenue-based financing for startups a bad choice? A startup’s benefit could be another startup’s disadvantage. RBF might not be a suitable fit for your company for the following reasons:
- Specific approval requirements; are not ideal for pre-revenue startups
- Funding limited by revenue; may not meet large-scale needs
- Higher financing costs compared to conventional loans
- Potential cash flow impact with required repayment and interest
- Short payback periods combined with a slow ROI can lead to financial stress.
- Not suitable for startups in survival mode; higher interest rates and terms may pose risks
Top Revenue-Based Financing Companies in the US and Europe
The top revenue-based financing companies in the US and Europe:
| Company | Overview | Sectors Funded | Geographies Covered | Funding Amounts | Funding Currencies | Source of Funds | Funding Eligibility |
|---|---|---|---|---|---|---|---|
| Clearco | Pioneers in revenue-based financing for e-commerce and SaaS companies. | SaaS, e-commerce, digital marketing | North America, Europe, Australia | Up to $10 million | USD, CAD, EUR, GBP | Institutional investors, private equity | Consistent monthly revenue and digital presence |
| Pipe | Offers a marketplace for trading recurring revenue for upfront capital. | SaaS, subscription-based businesses | USA, expanding globally | Up to $100 million | USD | Institutional investors, private funding | Recurring revenue and long-term contracts |
| Karmen | Provides flexible funding options tailored for tech startups in Europe. | SaaS, tech startups | Europe, especially France | Up to €5 million | EUR | Venture capital, institutional investors | Recurring revenue and strong growth potential |
| Liberis Limited | Supports SMEs across various sectors with revenue-based financing. | SMEs, including SaaS | UK, Europe, USA | Up to £1 million | GBP, USD, EUR | Institutional investors, strategic partners | Stable revenue and established customer base |
| Viceversa | Focuses on digital media and SaaS businesses, especially in Italy and Spain. | SaaS, digital media | Europe, particularly Italy and Spain | Up to €3 million | EUR | Venture capital, private equity | Consistent revenue from digital-first businesses |
| Outfund | Provides growth capital to digital businesses like SaaS and e-commerce. | SaaS, e-commerce, direct-to-consumer brands | UK, Europe, Australia | Up to £10 million | GBP, EUR, AUD | Institutional investors, private funding | Strong growth and revenue streams |
| Uncapped | Offers non-dilutive capital for e-commerce and SaaS businesses across Europe and the UK. | SaaS, e-commerce, direct-to-consumer | UK, Europe, expanding globally | Up to £5 million | GBP, EUR | Institutional investors, private equity | Recurring revenue and growth potential |
| Re | Provides funding to SaaS and subscription businesses in Europe with strong recurring revenue. | SaaS, subscription-based businesses | Europe | Up to €10 million | EUR | Venture capital, institutional investors | Strong ARR (Annual Recurring Revenue) |
| Ritmo | Spain-based company providing growth capital to e-commerce and SaaS businesses in Europe. | E-commerce, SaaS | Spain, Europe | Up to €5 million | EUR | Private equity, institutional funding | Stable revenue from growing digital businesses |
| Wayflyer | Provides fast, flexible funding solutions for e-commerce and SaaS businesses. | E-commerce, SaaS | USA, UK, Europe | Up to $20 million | USD, GBP, EUR | Venture capital, institutional investors | Strong revenue track record in e-commerce |
| Capchase | Offers revenue-based financing for SaaS companies and tech startups. | SaaS, tech startups | USA, Europe | Up to $50 million | USD, EUR | Venture capital, institutional funding | Recurring revenue in SaaS companies |
| Silvr | Supports e-commerce and SaaS businesses with non-dilutive capital in Europe. | SaaS, e-commerce, digital-first businesses | France, Europe | Up to €10 million | EUR | Institutional investors, private equity | Consistent revenue and growth potential |
| MYOS | German company specializing in revenue-based financing for e-commerce and SaaS businesses. | E-commerce, SaaS | Germany, Europe | Up to €5 million | EUR | Venture capital, private investors | Predictable revenue in e-commerce and SaaS businesses |
| VITT | Spain-based company providing funding for SaaS and subscription businesses across Europe. | SaaS, subscription businesses | Spain, Europe | Up to €5 million | EUR | Institutional investors, private equity | Stable MRR (Monthly Recurring Revenue) |
7 Tips for Securing the Best Revenue-Based Financing Terms
Revenue-based financing agreements might have hidden costs and risks, so it’s critical to read the fine print and research lenders to avoid getting ripped off.
- Opt for long-term financing to reduce risk and maximize ROI.
- Apply for funding early, avoid merchant cash advances, and secure better rates.
- Demand full transparency on loan terms and costs.
- Avoid restrictive debt covenants that limit growth.
- Choose capital partners that don’t require warrants.
- Steer clear of personal guarantees or collateral requirements.
- Make sure the lenders are the right financial partner by carefully evaluating them.
4 Top Alternatives to Revenue-Based Financing Loans in November 2024
These are the best alternatives to revenue-based financing loans for your better options to look:
1. Invoice financing
Depending on your kind of company, invoice financing might be a better choice—especially if you’re not a startup. Invoice financing works similarly to revenue-based lending in that future invoices serve as collateral for the loan. Since repayment is based on invoices rather than general revenue, these loans are primarily restricted to B2B companies, but they are ideal for seasonal businesses with variable cash needs and cash flow.
2. Startup loan
Before selecting a revenue-based loan, you might want to consider other startup loan options if you need startup financing. A bank or online lender may be able to provide you with a faster, easier, and less expensive startup loan if you have solid personal finances and collateral.
3. Business line of credit
You might also want to think about getting a business line of credit if you want flexible options for repayment. Business credit lines are revolving and only charge interest on the amount borrowed, just like credit cards. As soon as you return the money you borrowed, you can borrow again. Under certain conditions, lines of credit may be a wise option for new businesses with immediate cash flow needs.
4. SBA loan
Businesses that are having trouble qualifying for a traditional business bank loan may want to consider SBA loans as an additional good option. The Small Business Administration (SBA) does not make loans; rather, it guarantees a percentage of loans made possible by various lenders, meaning that the loan will be supported by the SBA in the event of a default. This implies that riskier businesses or business owners with bad credit or financial standing are more likely to receive loans from SBA lenders.
How much Revenue Based Financing can you secure?
Finance providers will assess your recurring revenue to decide how much they are willing to lend you.
Typically, the maximum loan amounts are set at one-third of the annual recurring revenue (ARR) or four to seven times the monthly recurring revenue (MRR) of the business. They lend between $10,000 and $5,000 million.
Repayment fees typically range from 6 to 12% of revenue, depending on whether you want to use the money for higher-risk ventures like hiring or more dependable ones like advertising.
Conclusion
In conclusion, revenue-based financing (RBF) is a flexible way for businesses to get money without giving up ownership. Since payments are based on your earnings, RBF is safer than traditional loans, especially if your income varies.
However, it’s important to carefully review the terms and consider other funding options to make sure it’s the right choice for your business.
