Revenue-based financing is popular with growing startups, especially SaaS companies. Debt and equity financing are common when a business needs money, but revenue-based financing is a nice alternative, and may be a good choice if traditional funding is out of reach.
Revenue-based financing involves an exchange. Investors provide your company with capital upfront, and in return they get a percentage of your future revenue.
Unlike a loan, there’s no fixed payment, and no accruing interest. A repayment cap sets the total you’ll repay. And unlike an investment, they get no ownership in your company.
Repayment is a percentage of your monthly revenue.
The loan term length varies. Often there is no fixed end date.
You’ll retain 100% ownership of your company.
It’s also known as royalty-based financing, or as revenue-based lending or investing.
Repayment Cap
That upfront capital comes from a revenue-based financing company or investor. Some of the top providers are listed below.
Founders First Capital Partners
AltCap
Flow Capital
Uncapped
Instead of traditional interest, RBF companies set a repayment cap. Similar to factor rates, they vary by provider. The repayment cap is usually somewhere between 1.2 and 3.0 times the amount of financing you received.
The total you’ll pay is your total borrowing (investment amount), times the repayment cap.
Example: Say you receive an investment of $100,000.
The repayment cap is 1.2 times the investment.
$100,000 x 1.2 = $120,000 total repayment
So you keep paying a share of your monthly revenue until the full $120,000 has been repaid.
The fixed revenue share works like this: a cut of all your sales, whether your revenue goes up or down, until you’ve repaid the total. Your repayment percentage is usually something like 1% to 15% of your total monthly revenue, depending on your revenue and expenses. Some lenders charge as much as 25%.
When the total paid reaches the repayment cap, the financing is considered complete. Because payments are based on your revenue, many providers don’t set a repayment term. Other providers, like Flow Capital, require borrowers to repay their advances within set periods, such as two to four years.
Revenue-based Financing Can Be a Good Option
If you can’t get approved for traditional funding, revenue-based financing can be a good option. Because repayments are based on revenue, requirements are less strict. For example, your personal credit and the amount of time your company has been in business aren’t as important.
If your finances are uneven, flexible repayment could be an advantage. Most traditional funding requires a fixed monthly payment. The payment usually does not fluctuate, but your income does.
There is no tradeoff with dilution, because you keep ownership of your company and the financiers don’t take any.
On the other hand, it can be very expensive. Paying back a multiple of what you borrowed can quickly add up. If you borrow $100,000 at a 1.2 cap, your fee is $20,000. You might end up paying more than the cost of a traditional loan.
One of the drawbacks of revenue-based financing is that it can cause cash flow problems. Every month, a percentage of your sales goes towards repayment, leaving less cash in your bank account. This can make it hard to cover your bills if you have high monthly expenses.
On the downside, you need revenue to qualify, which means that pre-revenue startups aren’t eligible. Founders First Capital Partners, for example, only accepts startups that have at least $500,000 in annual revenue, and Flow Capital at least $3 million.
Revenue-based financing could be a good option for you if:
Your company is growing fast.
Your sales are regular and recurring, such as a SaaS subscription business.
Your revenue is solid but your credit is weak.
You’ve considered taking on an equity investment, but don’t want to dilute ownership.
Revenue-based financing might not be a good idea if:
Your company is pre-revenue.
Your profit margins are thin.
Better than Revenue-based Financing
Depending on your goals, the following may be better than revenue-based financing:
One option to look into is invoice factoring. If you sell to other businesses, and you bill them via invoice, then this could work.
With a loan, you borrow money; with invoice factoring, you sell your invoices at a discount. The factor sends you a lump sum of cash, and then collects from your customers themselves.
Factoring approval depends mostly on your customers’ credit, not yours. So even if you don’t qualify for traditional lending, factoring could work for you.
Online term loans are the best option if you have a specific goal for the money.
Online lenders set their requirements less strictly than most bank lenders. Many do business with startups, and it’s possible to get financing with bad personal credit. A term loan can fund a defined project like purchasing inventory, hiring staff, or running a marketing campaign. Online lenders can often fund in one to two business days.
A business line of credit can be useful if you need continuous access to working capital.
Using a line of credit is like using a credit card. You can draw on it when you need to, and then pay it back. You only owe interest on what you borrow, and once you have paid the amount off, it is available to draw on again.
A line of credit is useful for covering short-term cash flow, or any time you need money quickly without knowing the amount.
SBA Microloans offer up to $50,000 of financing to businesses that are traditionally underserved by lenders.
A microloan might work if you’ve been denied traditional funding but still need a loan. Microloans provide small amounts, and rates and terms are competitive.
Microloans are issued by nonprofits and community lenders. These lenders typically fund startups and entrepreneurs with damaged credit. They often provide training and resources to entrepreneurs as well.
About Delancey Street
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