Tue. May 21st, 2024
Revenue Based Financing

The concept of revenue-based financing or RBF came into existence with start-ups in India. Revenue Based Financing (RBF), a funding mode popular in the US, gradually gained traction among MSMEs, D2C, and start-up owners. Businesses, especially D2Cs, embraced this innovative capital source as an alternative to traditional fundraising methods.

Many companies offer revenue-based financing against a minimal, completely digitalized documentation process with a flexible tenure between 4 and 12 months. However, before understanding how RBF benefits, it’s essential to have an elementary idea. 

What Is Revenue-Based Financing?

Revenue Based Financing or RBF combines the features of equity and debt-based financing. This unique credit facility enables enterprises to leverage their projected revenues to obtain necessary funds. 

D2Cs, small businesses, and start-ups prefer this financing method due to the lack of fixed monthly repayment obligations. Instead of EMIs, companies repay an amount based on their earnings.

This relieves companies from overstraining their profits and reserves during off-seasons. It is possible as the quantum of RBF is a function of revenues, not the balance sheet. 

Businesses can avail funds via this method during any stage of growth, depending on revenue flow. Whether an individual owns a bootstrapped business or a start-up, RBF can be adequate to expedite development by leveraging estimated revenues.

RBF can be used for the following purposes:

  • Refilling inventory and expansion
  • Advertising and marketing expenses
  • Development of business in a new location 
  • Launching a new product
  • Capital expenditure expenses.
  • Plugging cash flow gaps

Borrowers can utilize the sanctioned sum to cover various expenses, including the ones mentioned above. Customized, secured, and unsecured offerings make this financing option even more convenient. Plus, we processes an RBF application and forwards the sanctioned amount within a few working days, favoring businesses seeking funds for urgent requirements.  

What Makes RBF A Perfect Financial Source For D2C Business?

Direct-to-consumer or D2C companies manufacture and ship products directly to customers. This allows D2C firms to retail their products at lower prices than consumer brands. There is no participation of middlemen or retailers. 

Since these firms control goods production, marketing, and distribution, maintaining a solid working capital becomes crucial. In this regard, RBF can work as a better solution as lending parameters are based on a firm’s projected net revenues, marketing performance, and cash balance. 

RBF is also an excellent liquidity source for D2C platforms as the sale volumes fluctuate as per demand. This gives borrowers the flexibility to repay more when they realize sizable earnings and less during the leaner months. 

What Are The Other Advantages Of Revenue Based Financing?

  • Simple Parameters

Revenue-based financing or RBF Companies allows borrowers to avail credit against minimum eligibility criteria. Unlike traditional business loans that require applicants to maintain a healthy credit profile and extensive documents, RBF involves basic requirements. Moreover, there are reduced chances of application rejection as the credit disbursal is completely based on a firm’s projected revenues.

  • Risk-free Credit

Collateral requirement is subject to the applied-for amount. Borrowers can avoid pledging any asset by opting for a lower amount. This allows businesses to keep their assets lien-free. However, collateral may be necessary if applying for a more significant amount. 

  • Low Borrowing Cost

D2C start-ups and MSMEs prefer RBF due to the low borrowing cost. RBF does not require borrowers to pay any interest, which depends significantly on the repayment tenure. Instead, they need to repay a multiple of the principal sum, notwithstanding said period.  

  • Flexible Repayment

Availing of a business loan is a medium-term obligation, requiring applicants to pay fixed monthly installments or EMIs. This can put a strain on company savings and reserves for future endeavors. However, RBF allows borrowers to repay the amount comfortably based on their revenue scale, making the repayment more manageable. 

RBF or revenue-based financing is an excellent solution for D2Cs and new businesses setting their eyes on aggressive growth prospects. However, every credit form comes with specific variables. It is an intending borrower’s responsibility to learn the specific terms and regulations set by a chosen lender for transparency. This would help entrepreneurs evaluate how to optimize their finances to make the most of this funding option.

Frequently Asked Questions?

  1. What is the revenue share in RBF?

The revenue share is the % of a company’s earnings being pledged to an investor. For instance, suppose your D2C business’s prospective yearly earnings stand at Rs. 2.4 crores. You leverage this to obtain Rs. 20 lakh against a 10% revenue share. Thus, the financing cost is Rs. 2 lakh, and the total payable amount is Rs. 22 lakh. 

  1. What is the repayment period for revenue-based financing?

Borrowers need to repay the borrowed sum + agreed-upon revenue share within a tenure ranging up to 12 months.

  1. Are equity-based financing and revenue-based financing the same?

Equity-based financing and RBF are similar because investors can receive repayments against the invested capital. However, the RBF doesn’t require a transfer of ownership, which is applicable in equity-based financing.

By Manish