When and How Revenue-Based Financing Can Be a Great Fund for Emerging Startups?

Revenue-based financing (RBF) is an alternative funding strategy that is an emerging form of funding for startups and businesses that are generating revenue and on a growth trajectory. By definition, revenue-based financing is a way that firms can raise capital by pledging a percentage of future revenues in exchange for money upfront. But unlike traditional venture capital or angel investments, with RBF, founders or business owners do not have to give up any equity in their company. 

Revenue-based financing shares similarities to debt financing but instead of securing the capital with personal assets or other collateral, RBF is secured with future revenue.

As a form of alternative capital, RBF, which is sometimes referred to as cash-flow based lending or revenue-based investing (RBI), can offer startups and established firms opportunities to obtain growth financing, quick funding, and even short-term financing necessary to help the business grow. 

Terms and Features of Revenue-Based Financing

Once the RBF funder provides the capital, the startup or business should then have the funding it required to achieve its growth targets. Every month, the company’s revenue will determine how much the RBF funder will receive depending on the terms of the agreement. The payments will continue until they reach the predetermined amount. 

Depending on the terms of the agreement, the amount paid back to the RBF funder can range from 3 to 5 times the amount of the original investment. While this may seem a bit high, for many startups or growing businesses, it’s a better option than giving up equity to typical venture capital firms, who often expect a Return-on-Investment (ROI) of 10x, 20x or more. 

Even though as mentioned, revenue-based financing shares some similarities to debt financing, RBF is technically not a debt because there are key, fundamental differences. The most important difference is that although the startup or established business will be required to pay monthly payments to the funder (dependent upon the amount of revenue generated) there is no interest paid on the outstanding balance. This means that no fixed payments are involved because the payments each month are dependent on the firm’s monthly revenue subject to terms of the RBF agreement.

If sales struggle for a month, repayment to the RBF funder will be reduced. But if sales skyrocket, the payments to the funder will increase on a proportionate level. 

Before handing over any capital, providers of revenue-based financing must have faith that the startup or business they are funding has stable revenue every month. Ideally, the best recipients for RBF are also on a solid growth trajectory. 

Advantages and Benefits

• The fact that business owners don’t have to give up equity in their company is a big advantage of revenue-based financing. Additionally, if a firm is generating steady revenue, RBF as a form of alternative capital can be a viable solution for founders or businesses owners who don’t have traditional collateral or in some cases, have less than perfect credit. For some startups and growing businesses, revenue-based financing can be a good option for those who may have a growing business but have difficulties securing a traditional bank business loan.
• Another advantage of RBF is that it can provide financing quickly. Once the application process begins, it can take as little as seven to ten days to receive funding. It can also be paid off immediately if necessary. The terms of most revenue-based financing agreements vary from company-to-company but can last from several months to a year or more. 
• RBF can also be advantageous because founders or business owners can have more flexibility with their company because they don’t have to lose control or give up equity. Founders and business owners retain their full equity stake. 

Is It Fit For Your Business?

RBF is not the right choice for everyone, particularly startups or businesses that don’t generate enough monthly revenue to qualify for this type of financing. Depending on the provider, the startup or business may have to have a track record of generating a minimum of $15K per month to qualify. 

Nevertheless, for startups and businesses that are consistently generating revenue and are on a growth trajectory, then revenue-based financing might be a great option to secure startup or growth funding. 

Although my firm, Ron Flavin, Inc. does not work in the field of revenue-based funding, because I specialize in non-dilutive funding such as government grants, cooperative agreements and other non-traditional, government-backed funding instruments, I do occasionally recommend RBF to to some businesses that are not quite a fit for my area of funding expertise. 

And while I’m sure the number of firms providing RBF is growing, I believe that Lighter Capital was a pioneer in the field.