Getting upfront capital in exchange for future revenue is now a bona fide reality.
Capital raising is a process that can put even the finest of entrepreneurs on the spot. Dilution in equity-based financing and collaterals in debt financing often leaves entrepreneurs in a situation, that is – for the lack of a better term, choosing between the devil and the deep sea.
It's no wonder, then, that revenue-based financing walks in to save the day.
From 2020 to 2027, the global market for revenue-based financing is expected to grow at a CAGR (compound annual growth rate) of 61.8%. By 2027, it is expected to be worth a massive $42349.44 million. Thus, as an emerging non-dilutive financing option, it makes sense for CEOs, founders and executives to grasp the nuances of revenue-based finance for their businesses.
So, without further ado, let's walk through what revenue-based financing is, and whether pivoting to this fundraising strategy is your much-needed solution to a capital crunch.
Revenue Based financing or royalty-based financing is a way for founders to raise capital by pledging to exchange a certain percentage of their future revenue. For example, if a company borrows $250,000, it may promise to return 3% of its monthly revenue as payback.
If such advances are issued for your company, investors expect you to pay the initial amount invested and a small platform fee.
Primarily, your business's financials decide how much your company may borrow from the investor. Nonetheless, revenue-based funding is a relatively simple and fast procedure; and there's no pitching or massive paperwork to deal with.
Too technical? Let's run by an example:
Suppose you are a start-up owner who sells sunglasses online. It's been one and a half years since you started, and now you're generating a steady, predictable revenue stream. You wish to ramp up your marketing and advertising efforts to accelerate growth, but you're not very keen on diluting shares.
Enter revenue-based financing. You can now opt to approach a revenue-based financing company of your choice to raise this capital. To ensure you're eligible to obtain capital, they analyze your previous marketing data, financial history, and projected earnings. Based on that, you are offered contracts that come with a fixed percentage revenue share that you will return, along with the initial amount. Since your company has been doing well for the past 1.5 years, you readily get capital in a matter of days – without massive debt or dilution to worry about. Sounds just about right, doesn't it?
Ideally, revenue-based lending works best with, or as an alternative to, equity and debt finance. However, if high-interest rates, equity dilution, P & L statements, collaterals, or loss of control bother you, consider revenue-based financing.
Primarily, entrepreneurs may opt for revenue-based financing when:
While there's no hard and fast rule for the industries that revenue-based financing caters to, some domains do exceedingly well with this funding method. For example, e-commerce companies are a good fit for revenue-based financing. They can borrow capital during peak seasons (like the Black Friday sales) where the expected monthly revenue rate (MRR) is high for a season and can repay it shortly, fulfilling their goals without any stake on hold.
SaaS-based companies also depend primarily on monthly revenue rate (MRR), which makes revenue-based lending a prime option for SaaS financing. D2C Subscription-based services have also caught hold of this alternative, for they have stabilized working capital cycles and need capital for inventory or marketing. Other industries that fit well with RBF include insurance, edtech, OTT, and media companies.
In addition, revenue-based lending does not expect owners to part with their equity or secure any collateral to gain funding- allowing rapid scaling.
Revenue-based financing works flexibly to allow instant funds without debt or dilution. Acquiring funding based on projected revenue is the magic that revenue-based financing unfolds. Let's take a look at how it works:
The first step to obtaining revenue-based financing funds is signing up with any revenue-based financing company. After that, you will need to link your systems so the platform can identify your annual recurring revenue, bank account statements, financial performance, operational health, and the like. Then, if your projected revenue is high enough, you will qualify for the advance. An estimate of what that could look like is given here:
The amount you receive: $100,000
Starting monthly revenue: 250,000
Repayment rate: 6%
Months to repay: 7
Most investors prefer giving an amount that's one-third of the Annual Recurring Revenue.
Select an offer amount that fits well with your financial needs. Then, you can analyze the repayment terms and select the most suitable contract.
The amount will be credited to your business bank account within no time after your respective revenue-based financing company completes the audit/due diligence.
That's all! You now have the growth capital you required. When times are sluggish, the repayment modalities also differ- this is perhaps the most significant advantage of revenue-based financing.
Repayment depends on the monthly revenue your company generates.
If it's a terrible month for your company, the repayment terms go down, too, allowing you to have a more extended repayment period.
But, conversely, they go high if your company does well, making the repayment period shorter. This is unlike other options where you're locked in with paying a certain amount irrespective of your revenue.
Flexibility rings aloud in revenue-based financing, and we at BridgeUp are a subset of this emerging non-dilutive option. We go the extra mile to ensure that the process is a smooth ride for you:
The charm of revenue-based funding lies in the fact that it combines the best of both worlds for start-ups and SMEs. Let's understand why revenue-based lending is sought after in the start-up economy:
Traditional financing options take months to settle in a good deal, while RBF is entirely digitized, and the entire process can be completed within a few days. For example, after selecting your contract, BridgeUp can credit the amount to your account within 24 hours!
Other than being fast, a high rate of returns (almost 10-20x) is expected in fundraising strategies like angel investing or venture capital. The other financing options also cost more – what with equity returns or exorbitant interest rates.
Any founder would genuinely cherish the freedom to make their own business decisions. Whether you opt for revenue-based financing as the sole growth capital raising strategy or in tandem with other options, it helps you retain more ownership by neither compensating any equity nor losing a board seat.
No business growth is ever a direct, linear path. The amount you repay each month with revenue-based funding depends on the company's revenue. This flexible repayment system leaves room for founders to breathe in peace.
You can now bid goodbye to personal guarantees or collaterals and the lingering doom of these assets being taken away.
Coupled with other fundraising options, you can leverage revenue-based lending to meet your capital needs and accelerate growth.
It's difficult for pre-revenue or small companies to qualify for revenue-based financing as most platforms require proof of recurring revenue before you can trade. At BridgeUp, we service companies that have earned revenues for a minimum of 12 months.
Revenue-based financing investors provide less capital than VCs that fund massive amounts of money. However, this can be extended by follow-up rounds or frequent withdrawal of capital.
Even if the payment system is flexible and tied to revenue, the borrowed amount must be paid off monthly.
Revenue-based financing is touted as a hybrid between debt and equity financing. The advantages are a testament to why it may eventually become a mainstream funding option for start-up founders. If you need clarification about whether revenue-based financing is right for you, feel free to call us at +91-9819660287 or drop us a query on this form here.
Not really. Unlike a traditional loan, revenue-based financing platforms don't charge any interest or take warrants, collaterals, or personal guarantees. Instead, the only asset that is traded is your revenue.
In short, revenue-based financing works on the premise that companies can raise capital by promising to repay a fixed percentage of their future revenue. The principal amount and an added revenue share will be paid back to the investor, depending on the flexible monthly income.
SaaS companies run on a subscription model based on recurring revenue, which makes them an ideal fit for revenue-based financing. In addition, D2C and e-commerce companies also make for popular options for revenue-based lending.
Revenue-based lending relies on letting founders grow at their own pace, without them having to give up too much equity too soon. This also gives them the ability to get better prices in later rounds.
The initial investment is repaid to investors in the form of recurring monthly installments, along with a small platform charge. Investors earn a fixed income return on an uncorrelated liquid asset at the end of a 12-month period. BridgeUp is a liquid marketplace where you can further sell your contracts.