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A complete introduction to Revenue-based Financing (RBF) for founders

Revenue-based financing in Europe

Read our comprehensive guide to understand Revenue-based financing (RBF) for growing businesses. Learn how RBF is changing the game.

Viceversa Team

Articles written, submitted and curated by the Viceversa team and community.

For motivated entrepreneurs or start-up founders, it is crucial to generate funds for the successful operation and growth of the company. Nowadays, several options are available for raising investments from various players in the ecosystem. From grants and subsidies to selling equities, to angels and venture capitalists, you have a plethora of financing options to acquire the necessary funds. Including something called Revenue-based Financing (RBF), which we will jump into soon.

With so many capital financing options and less time for start-ups that are more focused on the scalability and growth of their products or services, it can be overwhelming for the founders. Sometimes, we may end up choosing a financing option that may prove to be detrimental in the long run or lead to over-sharing of equity structure.

Guys looking at a laptop thinking, Revenue-based Financing
Photo by Yan Krukau

But there are funding opportunities where you don’t have to dilute your equity or resources and still achieve the necessary finances to grow your start-up, scale-up or really, any kind of online business. Through Revenue-based Financing (RBF), you can achieve this objective. Many entrepreneurs find Revenue-based Financing a more appealing funding option than traditional loans or venture debts over the last few years.

And that’s why it’s important to clearly understand Revenue-based financing and how it is more beneficial than traditional bank loans, venture debts, and other financing options.

What is Revenue-based Financing?

Revenue-based Financing is referred to as royalty-based funding. Revenue-based financing helps you raise necessary funds based on the track record, business model and performance of your company, and repayments of the funds are made based on the revenue generated.

Investors providing non-dilutive financing or RBF options to start-ups or other companies invest some funds in the companies for a trade-off on some percentage of the company’s revenues. This process of the trade-off of the company’s revenue for the funds provided by investors carries on until a pre-calculated amount has been achieved.

What about traditional loans?

Traditional loans can be interpreted as banking as well as non-banking loans, where these financing organizations provide specific credit structures to the companies seeking funding. These loans are associated with interest rates that need to be paid along with the original loan amount within a fixed period. On the other hand, RBF tends to be more flexible when it comes to the interest or the repayment period.

Sometimes, the loan providers also ask for collaterals and fixed repayment structures before offering you any funds. Conventionally, debt financing and equity funding options have been the most prevalent ones, that includes bank loans as well as venture capital organizations. In the case of RBF, there is no collateral or guarantees needed and usually are non-dilutive.

However, we can gather that even with Revenue-based Financing, companies still have to pay certain amounts at regular intervals to investors. Then, can we say that Revenue-based Financing is a loan?

Is Revenue-based Financing a loan, debt or equity?

No, Revenue-based Financing is not a loan at all. Although it may seem that the concept of making repayments regularly is the same in both Revenue-based Financing and traditional loans, there is a huge difference between the two.

As compared to loans, Revenue-based Financing doesn’t involve any interest payments on the outstanding balance, no fixed payments, and there is no need to offer any collateral for obtaining these funds from the investors. Financing is specifically done based on the company’s revenue generated, thus eliminating the need for interest or collateral needs prevalent in loans from financial institutions. Usually these services are provided on a basis of either a fixed fee in some case and a Revenue Share Percentage (RSP) in other cases.

But why should you choose one over the other?

Revenue-based Financing vs Venture debts and Traditional loans

  • Tedious application forms
  • Long email exchanges
  • Inspections of the company’s performance and growth
  • Credit history
  • Collateral necessities…

Should we go on? These are some of the aspects of bank loans for businesses that make it a tiresome task. Moreover, you have to wait for many months to get approval for your loan. Whereas with RBF your application is completely online and capital is approved, at times, in less than 3 days. With banks, in some cases, the loan doesn’t even get approved even after the financing institutions have a clear inspection of your credit history and the track record of your company.

People and money hands, Revenue-based Financing
Photo by cottonbro studio

But, what about angel investors or even venture capital organizations? Angel investors and venture capital institutions demand a certain equity percentage in exchange for the funds that they offer. And while that sounds simple enough, this can even turn out to be more difficult for the company than the debts or loans that you acquire from banks. Not to say, it takes months for the capital to come through and is usually tied to a number of conditions.

By giving a certain percentage of your equity to venture capital firms and angel investors, you hand them a certain percentage of control of your company. This can be highly demanding for the company that is looking for independence, creatively and financially.

Revenue-based Financing structure, on the other hand, is dependent on the performance of the company taking the funds. The repayments done through Revenue-based Financing are proportional to the revenue generated by the company. If in a certain month, there is a decrease in revenues, the payment to the investor gets reduced, as compared to the months when there is an increase in the revenue of the company.

Revenue-based Financing is different from debt financing and equity funding as there is no debt or loan included while acquiring funds through revenue-based financing. There is also no equity sharing with the investors that avoid the possibility of any ownership sharing of the company. Additionally, there is no requirement for any collateral or any type of fixed payments in Revenue-based Financing.

But are you suited for Revenue-based Financing? Let’s look at what kind of companies are suitable for a Revenue-based Financing structure among all other funding options. This can help start-up founders understand how Revenue-based Financing can help them get working capital by taking into consideration their business models and their funding requirements.

Who can get Revenue-based Financing?

person writing on a laptop Viceversa

With Revenue-based Financing, you can achieve the growth milestones for your company while successfully sustaining the liquidity and ownership of your company. Let us have a look at some of the use cased applicable for companies to seek a Revenue-based Financing option.

1. Digital businesses witnessing huge growth

The company is witnessing massive growth. This implies that you need more capital to increase or maintain your inventory, to spend on ads and marketing for better reach out, and several other necessary factors, like shipping. These factors are highly dependent on the increased revenue that the company generates and thus, the company founders can conveniently apply for Revenue-based Financing from investors. Moreover, the investors will also be willing to invest in your company based on the incredible revenue and growth record of your company.

2. Businesses looking to expand without dilution

There comes a situation for every business, when the company has ample cash flow that meets your necessary capital expenditures. However, with this growth record, you want to expand your marketing and branding activities on a larger scale. In such a situation, you want to raise capital from interested investors while avoiding any dilution of your equity. Here, Revenue-based Financing comes into play where you can get funds from investors without losing your equity.

3. Retail businesses with huge orders but less capital

If your product or service is well-liked and exciting, then you might see a tremendous increase in orders within a short period from when you started your sales. In such situations, you might end up with a lack of proper inventory or less working capital to deploy these orders. This not only disrupts your company’s revenue generation but also brings unsatisfied customers and poor experiences. With Revenue-based Financing, you can apply for funds that enable order fulfillment without hassles.

4. Start-ups that have already raised some investment

As a founder of your start-up, you were successful in raising an interesting seed round of funding. You have already invested these funds in the company’s strategic pressing matters. However, you find yourself in a situation where you still need more capital to ensure your plans for growth and expansion are met. Revenue-based Financing is the perfect method to obtain these funds in such a situation. What’s more? You don’t have to dilute your equity while you retain the funds obtained from the seed round.

Revenue-based Financing is the newest good/bad boy in town, but we’ve been hearing more and more about these new alternative forms of funding. Cool new fintech companies are making it the buzzword in the ecosystem and we are here for it. It’s not a popularity contest, but if it were… we’d love to see how it all came about.

How has Revenue-based Financing become so popular?

Revenue-based Financing
Photo by Kindel Media

Because of this characteristic of Revenue-based Financing through which companies can access fast cash for their growth and capital needs without having to dilute their company’s ownership, this type of funding has witnessed amazing growth in being adopted by the companies.

Since the year 2019, more than 18 Revenue-based Financing start-up companies offer the necessary capital in exchange for some amount of the future revenue or sales of the companies that range from a minimum of 5% to a maximum of 20%. These financing options have significantly reduced the stress of capital needs of the startups, while allowing them to keep their equity unadulterated.

According to this article by Sifted, in the year 2021, approximately $600 million in venture capital opportunities were explored by the Revenue-based Financing start-ups. In the year 2022, with the help of funding raised through Wayflyer, Silvr, and more, the RBF start-ups were able to generate nearly $220 million successfully. And it is clear that these trends will keep on increasing in the overall market size of Revenue-based Financing opportunities.

Liberis commenced in the year 2007 and has since aided more than 18000 start-ups and SMEs in the US, Europe, and the UK by offering approximately £ 500 million in funds. In 2021, the collaboration of Liberis with Klarna has resulted in Liberis offering a RBF option through the Buy Now Pay Later services offered by Klarna.

In 2015, Clearco started offering Revenue-based Financing options to several Saas companies as well as e-commerce platforms in Canada. With its institution in the UK in 2020 and in the Netherlands in 2021, it has funded different local UK start-ups by investing in them more than £ 500 million and has also received $200 million in funding from SoftBank’s Vision Fund II to accelerate the European expansion.

Is this a ‘New Wave’?

We all have heard about the ‘new wave’, right? The year 2019 marked the initiation of this ‘new wave’ with an evolution of Pipe, Wayflyer, Uncapped, and Uplift in the US, Dublin, the UK, and Berlin respectively.

As Pipe witnessed its introduction into the then European market by establishing an office in the UK in September 2021, it has since relished upon its manifold growth, achieving double unicorn title, and more than 12,000 customers within a year of its commencement. Similarly, the Irish fintech company, Wayflyer has enjoyed tremendous growth by offering Revenue-based Financing opportunities to only e-commerce start-ups and thus, being valued at more than $1.6 billion in 2022.

Several other Revenue-based Financing institutions such as Requr in Amsterdam, Ritmo in Madrid, Viceversa in Milan, Unlimitd in Lille, and ArK Kapital in Stockholm, and many more financing institutions are revolutionizing the Revenue-based Financing industry’s growth, expansion, and reachability of funds to numerous start-ups and e-commerce companies over the recent years. This has not only created a huge positive sentiment for Revenue-based Financing options for emerging start-ups over the years but also provided significant assistance to these start-ups in addressing their capital and expansion needs.

What does RBF have in common with others?

There is a common factor between the traditional financing methods and Revenue-based Financing option. As with other financing options, it is also true with Revenue-based Financing that investors should be careful about the companies that they are investing in since the repayment rate or amount is directly proportional to the revenue and performance of the company. Undoubtedly, offering Revenue-based Financing opportunities to start-ups ensures that the investors ensure productive returns. However, it should be considered that if any month the company’s revenue decline, the repayment amount reduces as well.

Additionally, there is also a common factor for the companies that seek financing options, regardless of traditional or Revenue-based Financing opportunities. As observed with other financing options, the Revenue-based Financing model operates efficiently in the case of companies that earn adequate revenues. Irrespective of the financing opportunity that the company avails, it should maintain ample gross margins on the revenue generated for being able to do necessary repayments in case of Revenue-based Financing promptly. This ensures that they do not fall short of the share of repayments for their investors while dealing with Revenue-based Financing.

In conclusion, Revenue-based Financing works perfectly for emerging companies while receiving ample funds for the company’s growth and development prospects. Revenue-based Financing has become popular over the recent years with a large number of entrepreneurs opting for this type of financing because it ensures fast cash availability within a short time.

Interested to hear more? Check out Viceversa’s RBF platform today.

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