SMBs have many loan and financing alternatives available from traditional and nontraditional lenders, ranging from equipment and inventory finance to a business line of credit and merchant cash advances. However, global supply chain issues, geopolitical conflicts, inflation, and recession talk have pushed lenders and borrowers alike toward more conservative loan options, such as revenue-based financing (RBF).
RBF commits the financier a percentage of a company’s future profits until a specific predetermined sum is attained. This sum is the fixed value of the initial loan’s amount plus a fixed fee.
Even though B2B is the largest RBF borrower, revenue-based loans are getting popular among SMBs due to their more affordable rates and flexible repayment durations. They only owe a portion of their monthly income, so borrowers won’t face a big payback they can’t afford even if they have a terrible month.
RBF is also more affordable than other forms of funding, including debt and equity finance. SMB owners maintain greater ownership and control without having to worry about collateral. On the other hand, lenders adore revenue-based loans since they can result in substantial returns with comparatively little risk. Capital can be avail in little as 48 hours, and both the financier and the company share the same aim of increasing income.
Emerging SMBs with low credit ratings, few assets, and a limited network of investors and venture capitalists, all of which may limit their access to conventional financing options, would be wise to consider RBF. As a result, RBF expands the pool of loans available to businesses, raises the borrower rate for lenders, and enables lenders to offer more loans.
How RBF is Evolving Around the World?
Marketplace models and borrowing debt capital are now the two primary forms of funding for RBF enterprises globally. Although the D2C/SaaS ecosystem is expanding in emerging nations due to various consumers moving towards growth, it is still not at a level of maturity that is on par with western markets. This solution is still relatively new in emerging markets, and businesses attempting to implement it must remember the value of educating their customers.
Marketplace Model: Businesses use this business strategy function by connecting investors and customers. RBF, with users of the marketplace, can engage in the brand story and invest in it, enabling institutions and people to donate capital to their beloved brands. Customers may relate to and wish to invest in D2C brands therefore the marketplace model may be more appropriate for them. Additionally, it is more difficult to grow to other nations using this model because the business must create liquidity on both the supply and demand sides of the market or handle challenging regulatory matters.
Debt Fund Model: Companies using this strategy take a balance sheet lending technique, which requires borrowing money to pay for the loans they give to clients. The platform will only be able to service high-risk consumers if it is unable to secure affordable funding, which could result in significant NPL and a lower TAM. Since all sources of funding are “proprietary,” the platform is not required to build trust between users and investors. Because the business does not need to raise funds in every nation it targets, this model is also simpler to implement in new nations. Unlike a marketplace approach, there is no need to match investors and enterprises, which speeds up the deployment of funds.
Revenue-based financing is a great solution for the pain points of Small- to Medium-Sized Businesses. Vendors looking to expand their SMB loan offerings may choose Vedfin- a financial institution that provides revenue-based loans.