Most startup tech companies come to a point in growth where an influx of capital is needed to take the business to the next level. The most common financing options are either debt or equity-based through resources such as venture capital, traditional bank loans, or angel investors. There is another option that is considered to be a combination of debt and equity financing: Revenue-Based Financing (RBF).
Here we have laid out RBF’s pros and cons to help decide if it is the right funding option for you.
Revenue-based financing is similar to equity financing in that funding is secured through investors or firms such as Venture Capitalists (VC). They differ, though, in that VC financing requires a share of the company or a seat on the board. Revenue Based funding does not require any control of the investment company. It leaves decisions and ownership entirely to the founder.
No Personal Collateral
Revenue-based financing is similar to debt financing, such as a traditional bank loan, because repayments are made monthly based on a percentage of future revenue. The main difference is that RBF requires no personal guarantee as collateral against the loan, such as in a traditional business loan. Meaning, you do not have to risk any of your personal assets.
Payments Reflect Revenue RBF is the most flexible option in investor financing because, as stated above, the repayment schedule is based on a percentage of monthly revenue. Therefore, if business is light, the payment is light. There will never be a month where the debt payment is more than the monthly income.
Revenue Based Funding is approved on a much more flexible standard than traditional bank loans. Approval is based on the company’s monthly recurring revenue (MRR), and payment is set at the original loan amount plus repayment cap, traditionally somewhere between 1.3-3x.
RBF has lenient requirements, such as no specific personal credit score or business experience. Because of this, it is an excellent option for small startups such as subscription-based services and software-as-a-service company.
Unlike with VC funding, RBF investors have a mutual incentive for companies to produce revenue early in the investment. VC investors invest large sums of cash upfront, but do not see a return until the back end. For RBF investors, the incentive lies in the fact that the higher the monthly revenue, the higher their monthly percentage.
Having RBF investors interested in the company’s success early on allows founders to receive genuine help and advice from investors. These investors desire to see paced and steady growth lasting from month to month, versus unsustainable growth from a cash influx.
Additionally, because RBF investors do not gain from the sale of a company, there is no pressure to sell. This means founders can keep their companies as long as they desire.
Though the approval requirements are less strict than standard funding options, it does not mean that anyone can qualify. Because RBF uses the MRR to screen for eligibility, any company wishing to use it must already have a history of bringing in steady revenue from month to month. Therefore, RBF is not a great option for brand new businesses that are not yet selling products.
Revenue-Based Financing is an excellent option for giving a company a boost. Still, it will not save a sinking ship or allow for drastic changes in business structure. This is because the amounts secured through RBF are traditionally much smaller in size than Venture Capital financing. However, receiving lighter capital allows for shorter repayment times, ensuring that the company will not pay more in interest rates.
A monthly repayment plan is an excellent option for companies who already see steady monthly revenue. Still, it leaves out those who have not yet jumped into selling products or services. It also does not help companies who are looking to get out of operating at a deficit.
When considering RBF, companies need to keep in mind that the monthly gross margin will also be affected. This is due to a monthly repayment for the RBF that is now included in the equation.
New to Financing
Lastly, but worth mentioning, is that Revenue-Based Financing is relatively new to the world of Financing. Innovation is great, but this also means that there is not a lot of regulation involved yet. This aspect has the potential to lead to predatory offers and higher scam rates. Although this fact should not necessarily be a deterrent on its own, extensive research should be done when deciding on a Revenue-Based Financing company.
RBF with RevTek
Revtek Capital has a proven track record of providing the lowest cost available and being the quickest solution to funding early-stage growth.
To inquire more about how to accelerate your company’s growth through Revenue-Based Financing, contact us at (602) 730-4558 to schedule an appointment.