Sun. Jun 16th, 2024
Revenue Based Finance

Fundraising for all early and mid-stage businesses has always been crucial to meet their working capital and ascertain profitability. To obtain that financial stability and growth, these companies need to take their business to the next level through an influx of capital. 

While all entrepreneurs target growth and expansion, not many can implement it for several reasons. Inaccessibility to cash tops the reasons why many businesses are unable to expand their scale of operation, product portfolio, or quality of service offerings.

Traditionally, business owners have been dependent on investors and banks for raising money. They had to hedge equity shares or pay heavy interest rates in return. But that might no longer be the case anymore. Revenue-based financing offers collateral-free funds that businesses need for future growth without diluting equity. 

That being said, let’s delve deeper into understanding what revenue-based financing is and how it works.

What Is Revenue Based Financing?

Revenue-based financing is an alternative to the more conventional equity-based investments (such as venture capital or angel investing) and debt financing. Revenue-based financing allows founders to raise funds without diluting ownership or providing collateral. The repayments for the borrowings happen as a percentage of monthly revenue. This way, the business always has enough capital to manage inventory and marketing needs.

When you seek to borrow funds under revenue-based financing, the financier will research the borrower’s business to predict growth and make funding decisions. If the growth projections are satisfactory, they will share the financing terms and disburse the amount within a few days.

Revenue-based financing differs from venture funding and funding by angel investors by two distinct points. 

1. Revenue based financing doesn’t require dilution of equity and 

2. It doesn’t require pledging of collateral.

How Does It Work?

Businesses need upfront financial investment for their growth. Revenue comes in later. Most of the capital goes into building inventory, payments to vendors, and marketing. A typical business establishment shows a significant gap in working capital for at least three to six months. 

Furthermore, if your brand grows faster, you would need more capital to support the growth. In such a scenario, you will face a cash-flow gap that keeps increasing, even if you decide to invest most of your revenue back into the business. 

In this situation, if you can receive a portion of your future revenue upfront at a small fee, imagine how that could help your business. You could have the flexibility to use the funds for expanding your business. 

What Are The Benefits Of No-Collateral Revenue Based Finance Borrowings?

1 – Uncomplicated Application Process

When you are approved for most traditional bank loans, there is a whole lot of additional paperwork to be completed to secure the loan properly. Further, the lender has to perform an appraisal to determine the collateral value. 

Since Revenue based Financing does not involve collateral, the process of securing the loan is completely overridden. As a result, the application and approval process proceeds smoothly. 

Further, revenue-based financing applications are made online with a simple one-page application. Apart from a few minimal formalities like bank statements, the application procedure for business financing is a simple and convenient process. 

2 – Asset Value Not Consequential

In traditional, secured business loans, the value of the collateral you are pledging must be equal to the value of the borrowing. That means that the amount of the loan you can get is proportional to and limited by the value of your collateral.

With revenue-based financing, this restriction is removed since there is no collateral. So you are not limited in getting the loan amount you desire due to not having enough assets.

3 – Repayments Linked To Sales

Another advantage of revenue based financing is that since the repayments are linked to a percentage of your sales, your repayment amount increases when your sales figures and revenue are higher and less when the sales are down. Hence, the potential downside wouldn’t feel as hard as with other loans where you are required to pay the fixed instalments, irrespective of your sales graph position. 

To summarize, many small business owners and start-up ventures don’t have sufficient assets that they can offer as collateral. Others do not prefer to risk losing their assets if the business takes a nose-dive. Revenue-based financing would be a great fit for such borrowers. 

By Manish