Revenue-Based Financing is also known as Royalty-based financing. In RBF the investors put their money in the small and growing business in exchange for a certain percentage of their gross revenue. In simple words, when a person invests his/her money in a business to earn that money back in the form of the revenue earned by that business.
Let’s understand this by an example. You own a company and you need $1 million to grow it further. You are unable to obtain loans from banks and the shareholders are not ready to transfer their ownership of stakes in the company to investors. In such a case, you decide to raise the capital with the RBF model where you will get the $1 million in exchange for a certain percentage of the revenue. In addition to that, you also need to pay a certain times higher multiple of the original amount to the investors to compensate them for the risk. But the positive part of it is you get the amount you wanted for the growth of your business and now things depend on your hard work and dedication.
Now the question comes whether RBF is a good option for your business or not. Since everybody is talking about this capital raising method a lot, we are here with our perspective and to help you understand whether this is right for you or not. We will be talking about the pros and cons of this new model that is considered an alternative to the more conventional equity-based methods such as venture capital and angel investing. So, let’s explore.
Pros Of RBF For The Business
- Easy – As it is often seen that start-ups find difficulty in lending money from banks because of their lack of credit history or low credit score, it is much easier to fulfil the capital needs with RBF due to its less stringent requirements.
- Online And Transparent – Since all the transactions happen online whether it’s the capital you raise or the repayment of the installment or revenue, all that happens online and makes it trackable & transparent.
- Immediate And Effective – The requirements of cash flow are met immediately that helps the business owners to work towards the growth of their business effectively.
- Less Risky – Since there is no requirement to provide collaterals to investors, the business owners have control over the enterprise and all the decisions related to it.
- Simple Process – With fewer formalities, the fewer amount of information and online processing, the process of getting RBF is simple and easy.
Cons Of RBF For The Business
- Requirement Of Steady Revenue – As this model is revenue-based, thus the businesses that are too early in this journey or are in the pre-revenue phase, are not considered to be fit for this model. Because here the investors may consider the growth projections to determine whether the loan can be provided or not.
- Monthly Repayment – Since the monthly repayments have to be done, the companies who have not started selling their products or services or have not started generating revenues may not find it an effective option.
- Little Regulation – As this is a relatively new area in the financing sector, there is less government regulation. It is the responsibility of the business owner to carefully review the agreement and check the background of the lender for making the deal.
Revenue-Based financing is not everyone’s cup of tea as the model works only for those who are generating enough and sufficient revenue and have strong gross margins in their revenue because that ensures their ability to repay the invested capital. In general, this model is best for SaaS companies.