Revenue-Based Financing
  • July 19, 2022
  • Dr. Rajesh Sanghi
  • 0

India’s startup ecosystem is evolving with innovative and creative business models at a breakneck pace. To match up with the gait of this creation, the venture funding business is also witnessing newer acquisitions and changes. Revenue-Based Financing (RBF) is creating one such model that has provided ease to the financial solution of business. It is a unique financial solution that allows businesses to access the required capital without transferring ownership stake to funding partner.

By 2027, the global RBF market is predicted to reach more than $42 billion. The US already has unicorns in space and through this route, more than $2 billion was financed. To join the bandwagon this global uptick is pushing many Indian entrepreneurs. Startups are cashing in on the opportunity by accepting this innovative form of financing wherein the amount raised by a borrower is repaid as a percentage of future revenues. The financier also has the skin in the game to support revenue growth and take the risk of a drop in revenue and that’s the reason, in the growth of the borrower the financier ends up being a partner.

What’s the Noise Around RBF?

During times like pandemics, Revenue-Based Financing helped many businesses to stay afloat, as they offer a hassle-free paperless digital onboarding process and quick disbursal of capital within 48 hours. Therefore pandemic has been a blessing in disguise for the D2C business and many looking at expanding their business. Since the RBF involves zero collateral, many startups not on the radar of venture capitalists or private equity firms for funding seem to opt for this.

It not only provides funding to D2C businesses but also provides funding to the offline business as well. It is difficult for startups or any new business to get equity funding as traditional financial institutions have a precondition that they require collateral for funding. Simultaneously, equity also demands some shares leading RBF to become a sustainable solution for developing organizations.

Why RBF is a Good Option for Your Business?

Still, access to capital is a major challenge even though venture capital funding in India has been recorded high in the past few years. Business wants a type of funding option that make the funding process quicker, frictionless, and more transparent and RBF has all these features. It creates an opportunity for the people who have solid cash flow and is the superior way of accessing credits.

Equity leads to founder dilution, while debt creates fixed payment obligations, RBF plugs both these obligations. In RBF, repayments are directly linked to a company’s performance and the financier’s fees are also minimal. It is gaining traction because it effectively plugs equity and debt shortcomings.

RBF is an excellent option for young companies with steady cash flow and looking for cash upfront. Although, VedFin always recommends user analyzing the type of agreement, future sales, spans of the deal, and repay terms before choosing a company.

Dr. Rajesh Sanghi

Dr. Rajesh Sanghi is a serial entrepreneur and a mentor to several start-ups. Earlier, he was a transformation leader & chief architect for IBM India (Airtel) and awarded as a first Asian Recipient of IBM Gerstner Award & Corporate award, both for the first time in the Asia Pacific. He is also credited for building the first private STPI in Noida, Logix Park. He is BE(Hons) from BITS, Pilani and Ph.D. from IIT Madras.

https://www.linkedin.com/in/rajesh-sanghi-0360731b5/

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