What is Revenue Based Financing - How does it work?

Startups/businesses need funding where do they go…??

Usually, we choose a traditional way of funding which is - Debt and equity-based funding. Meanwhile, it’s not necessarily the best way of funding for the owners who avoid personal guarantees or giving away equity.?

That’s why Revenue Based Financing is something that is trending in recent years. But you are also thinking why is that so?

In this article, we will learn about What is Revenue Based Financing and How does it Work…??

What is Revenue-Based Financing??

It’s the way of raising capital for any company where Investors are ready to provide capital in exchange for getting a certain percentage of ongoing total gross revenue and the most attractive way of raising capital.?

Revenue Based Financing is a way of funding that is quite easy and requires less documentation. That's why it’s more popular than others. Meanwhile, it is somewhere relative to debt and Equity based Funding. But what’s the basic difference between these methods and why is it the best approach for most businesses??

How it differs from Debt Financing and Equity-Based Financing

Revenue-based loans are different and easy to pay than Debt and Equity Financing. As in the debt loan system, a borrower has to pay the taken capital with its interest rate at a particular time.?

And in equity-based loans, you may not have to pay the borrowed money with interest rate but a method of raising new capital is by selling company shares to the public, institutional investors, or financial institutions. People who buy shares are referred to as shareholders of the company because they get ownership of the company.

Meanwhile, Revenue Based Financing is the only way by which you don’t have to pay any interest rate, and your ownership also stays with you. It’s the way where Investors provide capital in exchange for getting a certain percentage of ongoing total gross revenue.?

How does Revenue-Based Financing Work?

It specifically works for SAAS companies. Payments to investors are directly correlated with how well the business is doing. This is due to the fact that payments are dependent on the amount of the business's income. The royalty payment to an investor will be decreased if sales decline in a single month. Similarly, payments to the investor for the following month will grow if sales in that month rise.

The fact that the investor does not directly control the business is another way that revenue-based financing is different from equity financing. Due to this, revenue-based financing is sometimes viewed as a combination of debt and equity financing.

Receiving funding requires having unpaid invoices or consumer debt. Exactly the reduced value of the pledged receivables is paid to the firm. The quantity of funding the company gets is significantly influenced by how old the receivables are.

To Sum Up:?

• With revenue-based financing, businesses can raise capital by promising a portion of continuous future revenues in return for the capital.
• Investors will get a piece of revenues at a certain proportion until a predetermined multiple of the initial investment has been returned.
• Typically, revenue-based financing is seen as being separate from both debt- and equity-based financing.
• A hybrid form of revenue-based debt financing is municipal bonds.

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