What is revenue based financing and how can it help your business?

There's a new, fairer & more flexible form of financing.

If you’re looking to accelerate your business growth with an investment in marketing or inventory, you’ll know that in the past your options were incredibly limited. Business loans require consistent repayments (no matter your revenue) - which often proves difficult for growing companies. Equity can be a great way to raise funds for growth, but is very selective and requires you give away at least some ownership of your company. But there’s now an alternative way to access the financing you needed to support your business.

More and more founders in the UK - especially those running digital businesses - are turning to revenue based financing (RBF).

Revenue based financing is a form of investment which combines aspects of both the traditional debt and equity approaches but with far greater flexibility. It’s an ideal way for start-ups and digital businesses to fund growth. It’s structured similarly to more traditional methods of financing but with a few important differences. Companies that choose revenue based financing repay investment over time to their investor based on a percentage of revenue earned by the business.

These monthly payments are equal to an agreed percentage of Monthly Recurring Revenue (MRR).The repayments continue until the agreed amount is repaid which typically takes anything between 1 - 6 months to complete. The total amount of financing usually comes to between one and one and a half times the original monthly recurring revenue.

With revenue based financing, founders’ and investor’s goals are more closely aligned as the faster the company grows, the more quickly investors are repaid, while the business itself is given room to grow without overextending itself with debt repayments. This is one of the biggest drivers behind RBF being used as a short-term option to fund sales cycles, special campaigns and targeted growth opportunities.

By structuring the financing around revenue and growth, businesses can also avoid the pitfalls of rushing to expand too rapidly and start-up founders are able to retain a higher degree of ownership in the business as it grows.

Real-world benefits of revenue-based financing

Many businesses, especially those in the digital space like eCommerce companies, SaaS firms, digital sales platforms and app based businesses struggle with limited access to funding via traditional avenues. In general most eCommerce businesses know that they have reliable, repeatable outcomes on digital ad spend. The uptick in sales from a digital ad push can help boost income, increase user numbers and provide the business with greater working capital.

But often these businesses just don’t have access to financing for digital ad campaigns and can therefore lose out to competitors.

With an RBF model, these companies are no longer playing catch-up and can compete on a level playing field with more established platforms, significantly increasing MRR and driving greater revenue into the business.

Atterley.com is a good example of a recent Forward Advances customer who made use of our revenue based financing to finance a big digital ad push and saw a 121% sales growth Year on Year in Q4 of 2020. Being able to access finance quickly helped the business grow, boost sales and increase return business and they were able to pay back the financing in a more flexible way than with traditional funding methods.

Likewise, with known working capital issues it can be more difficult to run the business in the most agile way possible that maximises cash conversion cycles. Many eCommerce businesses in the UK ran out of stock in early December last year. With working capital often tied up elsewhere, they were unable to order new stock to take advantage of the busy Christmas sales period. Every business has a slightly different cash conversion cycle and minimising the working capital fund gap between the time customers pay the business and when the business pays suppliers is crucial to operating as efficiently as possible.

RBF is perfect for this as it gives founders and business leaders access to financing quickly which can then be paid in shorter time frames than traditional financing options, allowing the business to order additional stock and inventory around specific dates or periods to take advantage of higher sales volumes.

“Atterley.com is a good example of a recent Forward Advances customer who made use of our revenue based financing. They saw a return of 121% sales growth Year on Year in Q4 of 2020.
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Why is RBF so topical right now?

We see that funding options for UK businesses and start-ups with a digital businesses model, like eCommerce platform businesses, apps, SaaS businesses and online marketplaces are often painfully limited. Right now, the 33,860 scaleup SMEs represent £1 trillion in value to the UK economy, or roughly 50% of all SME turnover. Those same businesses face a growth and innovation capital gap of up to £10 billion a year and a 40% retraction in equity investment which is stopping their ability to scale effectively. Globally, early-stage funding for Q2 in 2020 was worth $19.6b for the quarter, down year-on-year by 21% too.

Is it any wonder that against this backdrop companies are now looking for more flexible, reliable funding models?

Business leaders need access to financing that can help position their business for growth as confidence returns to markets and traditional avenues won’t cut it as we adjust to the new economic landscape. That’s why a revenue based financing structure is an increasingly attractive choice for digital businesses who want greater stability and access to more sustainable finance.

Why revenue based financing is a great fit for tech and digital businesses in 2021.

For digital businesses and start-ups looking to finance growth as we move toward a more stable financial landscape in 2021 and beyond, a revenue-based finance model could be a more flexible, fairer option for funding than traditional business loan models.

By choosing a revenue based financing option, digital businesses can:

  • Maintain a greater degree of control over ownership and operational/strategic decision making.
  • Benefit from the greater flexibility of performance-linked repayments.
  • Scale repayments based on business performance.
  • Access funding more quickly, with most decisions given in days.
  • Take advantage of no equity, no personal guarantees and no fixed payback schedules.
  • Fund operations without worrying about late fees or penalties.
  • Enjoy shorter financing terms, typically between 1- 12 months.

With a greater degree of control, more flexibility with performance-linked repayments and no late fees, penalties or equity requirements we expect more and more small businesses, particularly in the digital and tech sectors to shift to revenue-based financing.

See how effective revenue based financing could be for your business.

Revenue-based financing is becoming increasingly popular with UK digital businesses of all sizes, and particularly eCommerce businesses looking to fund next stage growth in 2021. The ability to access flexible, reliable funding and the greater options an RBF model offers for repayment means it offers plenty of opportunities to fund ambitious marketing and targeted advertising campaigns to make the most of the UK’s shift to online shopping channels.

Speak to the team at Forward Advances about how we deliver a smarter, fairer way to finance your business' growth. With flexible finance and performance-linked repayments from £10k - £1m, with a simple, one off 6% fee, we’re the choice of businesses looking for a smarter way to finance growth.

Get funded in as little as 48 hours.