Revenue-based financing (RBF) is an emerging funding method for startup firms and businesses generating revenue on a weak growth trajectory. By description, it is a technique through which firms can raise capital by pledging a share of future gain in exchange for money upfront. Unlike traditional venture capital or angel investments, business owners do not have to give up any equity in their company with RBF. Revenue-based financing is somewhat like debt financing, but instead of securing the capital with personal assets or other collateral.
Nowadays, many businesses are considered as new economy businesses interpreting they are tech-enabled, asset-light, and lack a long credit history. Traditional financial institutions such as banks do not have a strategic method of analyzing startups effectively, so they ask for healthy financial statements, goodwill, and security. In absence of, reluctant funding for these types of firms. So, RBF is a perfect way to boost business, capital, and profit.
The other option to be considered is raising capital through equity which may not be favorable for startups.VC firms buy the equity for a lower price and sell them at a higher price earning a huge profit. In a few situations, founders may be forced to sell equity for a less price ideal only to raise capital, which can be unfair to the founders.
RBF primarily solves these two problems using financial techniques to provide holistic credit valuations of a startup firm depending on its prospect for growth. It also provides a flexible repayment scheme that does not take off ownership from the founder. The financed amount can be paid back through a percentage of the borrower’s revenue over the months until the finance amount gets fully repaid. If a business performs poorly, borrowers are supposed to pay less amount, and in the case of profit, borrowers pay more amount (fixed percentage as per the
agreement). The process leads to the repayment of debt faster. This quality puts RBF differently from the other venture debt models, which generally take fixed monthly installments without considering a business’ most recent performance.
The known fact that business owners don’t have to give up equity in their company is a major benefit of revenue-based financing. Revenue-based financing can be a prominent option for a few startups and expanding businesses that may have a growing business but have difficulties securing a traditional bank business loan.
Another benefit of RBF is that it gives financing fast. Once the application procedure begins, it can take a minimum of five to ten days to receive the fund. It can also be paid back immediately if the business does not require it. The clauses of most revenue-based financing agreements keep changing from company to company but can last for several months to a year or more.
Hence in these ways, RBF has supported many startups and business owners from getting bankrupt or selling their equities and firms. It has been a big gift for startups to increase capital, especially in situations where such companies are not getting any support from the banks. The advantages and growth are neverending in the case of RBF, and if you want to dig into details and apply click vedfin.io.