Revenue Based Financing Startups – How Does It Work?
Introduction
You can look at revenue-based financing through the lens of an investor and a lender. Revenue-based financing (RBF) helps investors tap into investment opportunities with high returns. However, these opportunities come with risks since late repayments impact revenue growth.
Conversely, a revenue-based financing model is not for every company. RBF model is suitable for companies with a consistent revenue stream and want to implement the RBF model to improve gross margins and drive more growth through the investment amount. In a practical sense, revenue-based financing works wonders for SaaS enterprises.
Fundamentals of Revenue-Based Financing
The mechanics of revenue-based financing are more straightforward than you think. There is a reason RBF or revenue-based financing has become one of the most sought out alternative financing options.
Ordinarily, startups had no choice but to depend on traditional finance platforms, venture capital financing, or angel investors. And until startup companies couldn’t demonstrate their high profitability, they cannot become eligible. But revenue-based financing platforms quickly close the gap between bank debt and equity financing.
Interestingly, the RBF model caters to many businesses with short-term funding needs. Today, revenue-based financing has become essential for startups to sustain consistent revenue growth.
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Don’t confuse Revenue-based Financing with Debt & Equity-based Financing.
Unlike equity and debt-based financing, revenue-based financing doesn’t revolve around interest payments. In RBF, you calculate combined repayments of returns, which are higher than the original investment. Unlike equity and debt-based financing, the RBF model doesn’t propel companies to secure board of director seats. Also, RBF doesn’t have an ownership transfer stake for investors.
Mechanics of Revenue Based Financing
Revenue-based financing works by securing credit or borrowing based on the projected profits of a startup business. It is a simple model that gives the investor or the lender a specific percentage of the creditor’s income. Ultimately, the lender gets the principal amount along with the revenue share.
For example, Company X has an average revenue stream of Rs. 30 lakhs per month. However, Company X wants to make Rs. 3.6 crore annually.
And as per the revenue-based financing model, Company X will have to pay for their required debt with Rs. 30 lakhs. After a thorough evaluation, the lender or the investor gives the money at 12% of the revenue share.
Consequently, Company X can make repayments of Rs. 330,000 or Rs. 336,000 plus Rs. 360,000. When you implement a revenue-based financing model, you have to take into account several elements like growth capital, scalability, cash flow, and revenues.
Remember, the revenue loan terms depend on the financing company. Typically, the repayment cap ranges from 1.35% to 3% on the original loan sum.
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Top Revenue-based Financing Startups in India
Klub
This Bangaluru-based company operates in different industries and has a funding range from INR 500K to 20 million, which is $6,600 to $267,000. The revenue-based company is not as selective as other companies when providing funds.
Klub operates in D2C businesses, consumer apps, cloud kitchens, gaming, the FMCG market, subscription businesses, health and wellness, lifestyle accessories, and beauty and personal care.
GetVantage
GetVantage is a Mumbai-based SaaS company that operates in gaming, D2C, and eCommerce space and supports funding up to $500,000. The company inherently provides capital growth via revenue-based financing.
Velocity
Velocity specifically offers revenue-based financing in the eCommerce space. In fact, Velocity’s financial services are designed to cater to online startups and small businesses. The revenue-based financing company can support funding amounts from $6,000 to $400,000.
N+1 Capital
N+1 is a Mumbai-based revenue-based company and can support funding of $13 to $2 million. Entrepreneurs with the financial backing of angel investors are behind the company.
Unlike other revenue-based financing companies, N+1 doesn’t follow a generalized formula and doesn’t favor one sector over the other. It means it supports funding to all industries, and any type of business in any marketplace can apply for the required funding.
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Revenue-based financing Benefits
With revenue-based financing, startup businesses that don’t have a great credit score or a lot of valuable assets can tap into non-dilutive financing. Usually, debt financing appeals to banks, but it doesn’t pan out for SaaS businesses and startups.
Here are some essential benefits of leveraging revenue-based financing:
Maintain More Control and Ownership
In RBF or revenue-based financing, investors don’t need to take equity. And this, in turn, cuts out the reason for potential ownership dilution for founders. Additionally, revenue-based financing doesn’t secure board sets for investors or outline complex financial obligations for the startup business. Instead, it gives control to founders to maintain their direct connection with the company to fulfill their long-term vision.
Highly Cost-Effective
One of the benefits of RBF is it is a much cheaper financing alternative than equity-based financing. If a startup business is thriving, revenue-based financing can raise returns as high as 10%-20% for investors.
Avoid Paying Large Payments
In revenue-based financing, monthly payments come down to a specific monthly revenue percentage. It involves a percentage of their future revenues. It also leaves out room for startup founders to ensure there’s no bad financial month. Under revenue-based financing, monthly payments provide no added burden and help startup founders avoid paying hefty sums.
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Avoid Personal Guarantees
Depending on the degree of risks attached to a startup business, bank loans warrant specific personal guarantees from company founders to cover the high-risk investment. But this puts founders in a difficult position and propels them to put up their personal assets like a car or house. With RBF, startup founders can take a sigh of relief knowing there will be no required personal guarantees.
Faster Funding Process
Typically, it can take months or even years to pitch to multiple venture capitalists. With revenue-based financing, investors don’t propel startup founders to show high-valued assets or hyper-growth. On average, in RBF, lenders provide funding within a month. And this helps startup founders get funding quickly rather than wait for years to get around to venture capitalists.
Flexible Repayments
Company heads often prioritize more capital for their companies than they need, which leads to self-destruction. RBF, on the other hand, revolves around flexible repayments. So, once a startup business starts to grow faster, it increases the overall return of investors. It means investors and founders have something to gain out of revenue growth.
Why Revenue Based Financing Makes Sense in 2023?
As long as startup founders have a consistent stream of revenue growth every month, they can tap into revenue-based financing and avail the required funds. And lenders feel confident when they see the company has consistent revenue growth.
So, suppose you’re a startup business operating for a year. In that case, you can make a case to revenue-based financers without waiting for unprecedented revenue growth and improving your credit score.
It is one of the main reasons revenue-based financing has become a valuable solution for startups that need instant capital to sustain and accelerate growth. And startup founders can do this without compromising the ownership of the company.
With revenue-based financing, startup founders don’t have to settle for traditional financing options. Revenue-based financing inherently cuts out the red tape and speeds up the funds transfer process without the usual strings attached.
In revenue-based financing, startup founders can negotiate terms with lenders or investors. But in broader terms, revenue-based financing extends the funding capacity of the company. It eliminates the need to engage in back-and-forth traditional negotiations with venture firms or banks.
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Wrap Up
Today, startup businesses can leverage different types of financing options. But it is up to the company to minimize data-driven monitoring and paperwork. Today, companies can integrate and sync their data with major accounting and banking services. And once it becomes easier to analyze company information, you can better assess your financial strategy and make changes to work in your favor.
Startup businesses can grow faster and help founders repay the funds to investors. All it takes is recurring revenue to move forward with revenue-based financing. Revenue-based financing offers added flexibility to small businesses and empowers
If you’re looking for revenue based financing for your startup, you need to get your finances in order. A Virtual CFO can help your startup streamline your finances.
