Revenue Based Financing 101

What is Revenue Based Financing

Revenue Based Financing (RBF) a type of capital for growing businesses and start-ups. Your company will be provided with capital in return for a fixed percentage of ongoing gross revenues.

What are the benefits?

Flexible:

Revenue Based Financing is a flexible financing option which is based on your actual and future sales.

You get your financing ahead of time which allows you to deploy capital immediately. Repayments are based on your revenue so the payment will increases and decreases based on how your business performs.

Extend your runway and accelerate your growth:

By having access RBF, you can use this capital on growth initiatives like marketing and sales. The benefit of this is that it can accelerate your growth by spending more on growth without shortening your runway.

This frees up the more expensive forms of capital to be spent on other operational expenses like product and hires.

Is my business suitable?

Revenue Based Financing works best for businesses that are generating and growing revenue and have good gross margins.

eCommerce

For eCommerce businesses RBF is a great source of capital to build inventory stock for busy seasons and spend on marketing. There is a great virtuous loop of being able to use RBF to grow your business without diluting ownership.

SaaS

SaaS businesses have an amazing benefit of generating high gross margins. This makes them an excellent use-case for RBF.

How does Revenue Share work?

Loan payments are correlated to ongoing revenues. This means that the company pays a fixed percentage of revenues - when the company is growing faster the company pays more but if revenue is down, payments are slower.

So how does it work:

There are three components to to a revenue share agreement

  1. the repayment amount (this is the advance + fixed fee)
  2. the revenue share percentage
  3. the payback period

Say for example your business was making £100k per month in sales and you got a advance with a 6% fee.

You would have to payback £106k over 6 months. To repay it within 6 months, you agree to a fixed percentage of 18% of revenue.

But say your revenue drops down to to £80k, because you pay back at a fixed percentage your repayments also fall. What this means is that it will take longer to pay back but you are not hit with any additional fees or charges.

Want to know more?

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Photo by M. B. M. on Unsplash

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