Financial support is an important aspect for start-ups and for growing organizations to sustain, earning profits and maintaining quality is the key to success . The only measure of a start-up’s success is it’s increasing graph of financial Financial support is an important aspect for start-ups and for growing organizations to sustain, earning profits and maintaining quality is the key to success . The only measure of a start-up’s success is it’s increasing graph of financial growth which reflects its true potential of organizations. Traditionally, the source of finance to accelerate the business was limited only to loans from banks and other high-cost network based sources. Although, loan repayment often proves difficult for growing companies as they require consistent cashflow management, which is not ideally growth inducive.
Simultaneously, equity could also be a good way to raise funds but it requires giving away at least some ownership of the company.
Now, the scenario has changed, if you are looking to accelerate your business growth with an investment in marketing or inventory there is an alternative way to access the finance i.e. RBF. Many businessmen, especially those who are running digital businesses are turning to Revenue Based Financing (RBF) as a means to a better market valuation at later growth stages.
Revenue-based financing or royalty-based financing is a form of investment that combines equity approach of collaborative growth and traditional debt but with far greater flexibility. It is an ideal way to fund growth for the growing organization. It is a method of raising capital from investors for a business, and in exchange for the money, investors receive a percentage of the income. Until the predetermined amount has been paid the investors receive a regular share of the business.
The interests of RBF investors are aligned with the interests of the companies as the faster the company grows, the more quickly the investors are repaid. From revenue growth in the business, both the parties get benefitted, and when revenue declines this will impact both parties. The situation is exact opposite in case of bank funding contrasts where regardless of business revenue, the bank must receive a fixed monthly payment over the life of the loan.
One of the biggest drivers for MSME using RBF as a short-term option is to fund sales cycles, special campaigns, and targeted growth opportunities
With RBF, businesses can also avoid the pitfalls of rushing to expand too rapidly by structuring the financing around revenue and growth. As the business grows, business founders can retain a higher degree of ownership in their business.
Why Revenue-Based Financing?
Revenue-based financing is capitally availed to meet the cash requirements of a business and may be related to-
- Expansion of operational scale or unit of operation.
- Marketing and sales initiatives.
- Hiring talent and providing them with proper training.
Benefits of Revenue-Based Financing
Due to a lack of credit history or low credit score, start-ups often find it difficult to avail of the business loan sanctioned by a Mainstream lending institution. Additional to the fact , here’s how start-ups benefit from RBF-
- Effective and Simple Application – It helps in meeting the immediate cash flow requirements. Through this option, one can easily access funds and facilitate capital growth. Unlike traditional banks, applying for an RBF application requires only a simple one-page application.
- Less Risky- To avail of revenue-based financing start-ups are not required to pledge collateral. The firm owners also continue to retain their ownership and control over the enterprise.
- Flexibility- Typically when the revenue is more, the repayment amount is also more and when the revenue is less, the repayment amount is also less. Since RBF involves a flexible repayment structure when the startup grows faster, investor returns increase.
- Transparent- Financiers have a clear idea about repayments and the terms of the clearing.
Collectively, these features come in handy for start-ups and allow ventures to witness sustainable profitability and organic growth. Nonetheless, entrepreneurs who avail of revenue-based financing services offered by VedFin receive quality integrated cash flow solutions and easy terms of repayment.