For start-ups to sustain their presence and profitability, financial growth is crucial. The true potential of a venture cannot be realized without adequate fund support. To attain better financial health while fostering a better valuation base, start-ups need to avail financing services that can provide them with quick access to funds while allowing firms to achieve sustainable growth. While several financing solutions such as debt, equity, and venture capital exist, several VC-backed start-ups are shifting towards alternative financing solutions such as revenue financing that combines the best of all these options.
What is Revenue Financing?
Revenue financing is a form of business financing wherein a business venture (small and growing companies) agrees to share a portion of their future revenue in return for up-front capital. It is an alternative financing solution that lies between equity and debt financing. Investors can expect a return in the form of flexible and regular payments depending on a company’s performance in terms of sales and revenue.
These loans are non-dilutive as companies do not lose a stake in their business to retain control over it. And unlike traditional debt, they do not bind you to fixed monthly EMI’s thereby maintaining control, flexibility and ownership. This type of financing is suitable for post-launch businesses, as they can have economies of scale at COGS level and has growing Sales traction with established customers and a clear roadmap to sales expansion and growth.
According to a report shared by Allied Market Research, the global revenue-based financing market that accounted for $901.41 million in 2019 is expected to reach $42.34 billion by 2027.
While revenue-based financing typically sits between seed and venture capital funding, many businesses consider revenue-based financing to complement equity financing. It would be interesting to know how revenue-based funding supports venture capital?
Pre-VC Revenue-based Financing:
Minimize Equity Dilution: Founders usually look up to RBF as it is very dilutive, allowing entrepreneurs to grow their business without selling any equity stake to the investors. Entrepreneurs only require paying a certain proportion of their future monthly revenue.
Augment Company’s Valuation: The valuation or economic value of a company depends on several factors such as sector, industry, method of valuation, and more. VCs make use of cash flow models, market analysis, and financial statements to evaluate the economic value of a company. To boost their company’s financial performance, entrepreneurs can leverage RBF to fund their growth initiatives while securing a consistent flow of revenue. The valuation of a company increases if RBF is leveraged before a VC round.
Post VC Revenue-based Financing:
Help Qualify for Getting RBF: Companies in their growth or start-up stage usually qualify for RBF.
However, businesses that have less than a year of operating history fail to be eligible for RBF. To qualify for RBF, a company requires having a year or two of monthly revenue, and VC can provide the initial funds needed to grow a business. Once they have reached this level, they can look for RBF investors.
Cash Runaway Extended: Companies might have to extend their cash runaways for several reasons.
For instance, capital runaways can insure a business against cost overruns, clumpy revenues, potential pivots, and more. It also helps businesses to scale up by providing them with ample time for fundraising. The runaway a company requires depends on the type of company, yet firms recommend a period of 18-24 months for funding your business. However, the runaway is shortened for post- VC companies due to unexpected expenses or an expected burn rate. By leveraging RBF, companies can get the required growth capital without diluting more equity.
While venture capital can be enormously expensive, especially for companies that have become successful, revenue-based financing allows businesses to get the capital they require without diluting equity. So, if you are looking to accelerate your business growth, you must consider getting in touch with one of the reputed providers of Revenue-based funding such as vedfin that could anticipate steady growth and stability for your business.