What is revenue based financing?
Revenue based financing involves investors agreeing to provide a company with capital in exchange for a percentage of its ongoing gross revenue. It is an attractive option for many businesses as it does not require the company to sacrifice equity or put up its assets as collateral. It also requires less documentation which makes for an easier, less time-consuming process.
How does revenue based financing work?
The revenue based financing structure is similar to debt financing because the company will be providing investors with regular payments in return for their initial capital. However, it does not require any interest. You also won’t have to offer up collateral to investors or transfer ownership as you would in an equity model.
Platforms that provide funding will usually approve amounts that range from $10,000 to $10 million. Repayment is typically flexible so you can make higher payments when revenue is good and lower payments on slower months.
Why do you need revenue based financing?
Revenue based financing can be useful in the following situations:
- Your company is growing quickly, and you need more money to meet marketing needs and inventory demand.
- Your company is planning to expand and, while you have enough cash flow to stay afloat, you are not in a position to raise capital from investors, and you don’t want to give up equity.
- Your company just got a big order and does not have the funds to fulfill it, or it requires funds to fulfill it while maintaining abundant capital for optimal liquidity
- Your company has raised a seed round of investment, but you are setting it aside to meet capital needs and you need extra money to grow.
How is revenue based financing used?
Revenue based financing is used as a form of growth capital. There may be limitations on what you can use the money for put in place by the lender. In most instances, you can use it for a variety of business needs including marketing, sales, development, hiring staff and more.
Revenue Based Financing vs. Other Loan Options
When you compare revenue based financing to other types of loans, you may find it comes with its share of advantages.
It is preferable to venture capital which involves investors putting huge amounts of company in a business they believe in. This type of funding is terrific for getting expansion off the ground, but it comes at a high cost. It also often requires the company to give up equity and provide seat board control to investors.
RBF may also be easier to acquire than a bank loan as it does not require as much documentation which prolongs the approval process.
Is revenue-based financing a loan?
No, RBF differs from a loan in many ways. For example, it does not require interest or fixed payments. Rather, payments are proportional to revenue. It also does not involve collateral.
Revenue-based financing vs. debt financing
Debt financing involves the company raising money by selling debt instruments to investors. These include fixed income products like bonds, bills, or notes. It is a good option for some businesses because it does not require the company to give up equity.
However, RBF has its advantages over debt financing. For one, it only takes a portion of the revenue to recover the amount funded. This eliminates the pressure of paying fixed monthly installment.
Other benefits it offers over debt financing include:
- A more streamlined application process
- No collateral required
- Fewer covenant restrictions
Revenue-based financing vs. equity financing
Equity financing is the process of raising capital by selling shares of the company. Once you get into an equity financing situation, the lenders are brought on as shareholders of the business. They will have their say in business decisions and they will continue to collect profits until the relationship is terminated.
With RBF, only a small percentage of the business is shared with the investing platforms and ownership remains intact.
What are the requirements to qualify for revenue based financing?
Generally, requirements for revenue based financing include the following:
- An annual revenue of $200,000 or higher
- A consistent revenue with high gross margins (typically a revenue of at least $15,000 a month with growth margins of at least 50%)
- Profitability isn’t always required but it’s recommended for businesses to at least have a defined path to profitability
- Little to no existing debt
- Company diversity in that you are supplying products of services to at least five clients
- Location may also be taken into consideration; some platforms will only provide funds for businesses in certain countries
RBF is mostly exclusive to SaaS and technology companies as well as subscription-based businesses. And because the financing is largely based on sales and revenue instead of credit score and business history, revenue based financing for startups is a common option.
Is revenue based financing best for your business?
Revenue based financing does not fit every business model. As previously mentioned, it is typically used for technology, SaaS and subscription-based businesses. If your company does not fall into one of these categories, you may have a hard time getting approved for RBF.
However, if you do meet the category requirements, you may find that RBF is a terrific option. It eliminates the fixed loan payment structure which can be stressful and may even inhibit your business’s growth.
It also does not require you to give up equity which means you can retain 100% of ownership in your business.
How Kickfurther can help
Kickfurther can help brands that sell physical products with revenue between $150k to $15mm over the last 12 months. We connect brands to a community of eager buyers who help fund inventory on consignment. Brands can benefit from the flexibility to pay that back as they receive cash from their sales. Kickfurther is the world’s first online inventory financing platform that enables companies to access funds they are unable to acquire through traditional sources. Kickfurther has 800+ opportunities funded totaling $80mm+ and a 99% funding success rate.
If you need inventory funding, you should use Kickfurther. At Kickfurther you can get funded within minutes. Here’s how to get started:
- Create a free business account
- Complete the application online
- Review a potential deal with one of our account reps
- Get funded in minutes (funding times may vary)
When you set out in search of financing for your business, you’ll find there are several options to choose from. While research can require a time investment, it pays to fully understand all of your financing options. While revenue based financing may be the best option for some companies, it’s not the best option for all companies. We hope you better understand what revenue based financing is, as well as what other options may include.
Need funding? Visit Kickfurther today!