Revenue-based financing: An in-depth guide to what it is and how it works

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.

What is Revenue Based Financing

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?

When is the best time to look for Revenue-Based loans?

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:

  • The company is growing steadily but needs growth or expansion capital to fund further needs
  • The company has the sufficient cash flow to meet working capital needs but wants to expand. However, metrics are not favorable to raising capital from investors, and you do not want to dilute your equity
  • Need to launch a new product or expand the team
  • Need capital to upscale sales and marketing efforts
  • Need to stock up on inventory
  • Do not want to give away any more equity or take up a loan

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.

How does revenue-based financing work

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

1. Sign up on an RBF platform

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

2. Select your contract

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.

3. Repay the amount

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:

  1. Companies sign up and sync their systems with BridgeUp.
  2. They are assigned a trade limit, and pools of their contracts are made available to trade.
  3. Our enlisted investors place bids on those contracts.
  4. Within 24 hours, you can receive the credit you need for your growth capital. 

Pros of revenue-based financing 

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:

Fast, economical, and sturdy

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. 

Complete control

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.

Flexible payment system 

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.

No collateral needed

You can now bid goodbye to personal guarantees or collaterals and the lingering doom of these assets being taken away.

Works well with other funding options

Coupled with other fundraising options, you can leverage revenue-based lending to meet your capital needs and accelerate growth. 

Disadvantages of RBF

Business needs to be revenue-churning

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.

Less capital

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. 

Monthly repayment methods

Even if the payment system is flexible and tied to revenue, the borrowed amount must be paid off monthly. 

Final words

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.


Is revenue-based financing a loan?

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.

How does revenue-based financing work?

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. 

Is revenue-based funding suitable for SaaS companies?

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. 

Is revenue-based financing an alternative to private equity?

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.

How do revenue-based financing companies and investors get their money back?

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.

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Zeus Dhanbhura

Zeus Dhanbhura

CEO at BridgeUp