How do you raise money to grow your business with RBF?
Revenue-based Financing (RBF) is a financing model that lends based on a company’s revenue. In this way, companies can raise large amounts of money, as long as they have adequate revenues. At the same time, revenue-based financing does not close the door on smaller entities – companies with low revenue can still count on a loan, though of course on a smaller scale.
A distinctive feature of this type of financing is that it does not require collateral (mortgage, surety, etc.) or a prolific credit history. This makes revenue-based financing an interesting form of raising capital for the SME sector and for companies that have been on the market for a short time.
Important!
Some sources also call revenue-based financing revenue-based investing or royalty-based investing, and use the acronym RBI.
Exclusions for revenue-based financing model
Since RBF operates on a revenue basis, a disqualifying factor for companies is the inability to show sales history. The borrower, wishing to benefit from the loan, must provide the lending company with sales data – for example, from the sales platform it uses. Another option is to disclose bank statements attesting to sales made.
Interest-free loan – is it possible?
The RBF model is sometimes presented as an interest-free loan. In fact, the borrower does not pay interest, but this does not mean that revenue-based financing is cost-free financing. As part of the agreement between the business using RBF and the lender, the latter acquires the right to a portion of the borrower’s current revenues.
This means that by making a sale, the borrower automatically repays the debt incurred – as he receives a smaller amount in his company account than that resulting from the sale, since a fixed percentage (usually above 5% and below 20%) goes to the account of the company that transfers the funds.
Revenue-based financing with fixed installment
Although RBF is usually granted for a relatively short period (usually one year), in some cases a modified model is used. The latter involves tying up the contract for a longer period (usually up to 60 months) in exchange for a lower percentage of revenue. This is a solution designed for companies that are just starting out and want to retain more control over revenues. The risk in this case is… the rapid growth of the company.
If the company significantly increases its revenue during the term of the contract, it may end up paying the lender a much larger amount than the financing it received.
For whom is this form of financing?
RBF is a solution that e-commerce operators are particularly keen to use. It is relatively easy to verify historical sales data – mainly because these companies often use online sales platforms. What’s more, online stores, often have high revenues, which makes it possible to obtain financing for high amounts.
From the point of view of those running an e-commerce business, RBF proves to be a great solution for seasonality and weaker months immediately following the busiest periods of the year, such as Christmas or vacations (depending on the profile of the store).
RBF is also often chosen by companies whose revenues are based on subscriptions. This is also the most desirable audience for lenders. Their income is steady and predictable, which makes companies eager to provide financing – even for high amounts.
Benefits of revenue-based financing
What are the benefits of revenue-based financing?
You keep the shares of your company
Investors often tempt young, growing companies by bailing out their operations in exchange for a share of the business. While this can be a beneficial solution in many cases, it involves a partial loss of control over your own company. With an RBF, you can gain the funds you need to grow your business while retaining one hundred percent of the shares.
Rapid growth = rapid payoff
If you’re expecting rapid growth, you’ll be happy to know that with increased sales you’ll be able to pay off the commitment faster.
Instant transfer
As a rule, RBF model financing is launched within a few days (some lenders declare even 24 hours).
Flexible repayment
RBF is calculated in such a way as not to overburden your business. So in the months when you have weaker sales you will pay the lender accordingly less, but when you have high revenues, the installment will be larger. This way you won’t be intimidated by seasonality or the months following the busiest shopping periods of the year.
Any target
Once you have obtained RBF financing, you can spend the money for any purpose – investments, marketing, office equipment. In the end, you are the one who knows best in which direction you want to carry out further development of your own company.
Disadvantages of revenue-based financing
A financial solution that suits everyone has yet to emerge. Before you decide on RBF, check whether its disadvantages are crucial for your company.
Not for new companies
If you’re just starting a business and hoping for a cash injection to get off to a brisk start, look for a different type of financing. Revenue-based financing requires you to have at least several months of sales history. What’s more – those sales should be stable. Lenders are reluctant to look at startups and companies that generate very erratic revenues.
Rather short financing period
This is not necessarily a disadvantage, but RBF is usually granted for a relatively short period (usually 12 months). If you are looking for permanent financing that your company will use for many years, check out other forms of financing, such as factoring or a bank loan.
Amounts limited by the value of sales
Although you can borrow large amounts under RBF, this option is only available to companies that generate exceptionally high revenues. Having even stable but low revenues, you can’t count on a large loan. This one could be guaranteed by a private investor, but – of course – at the expense of shares.
Revenue-based financing step by step
Revenue-based financing can be passed in three relatively simple steps.
First – establish a relationship with a lender
Contact the company that provides the RBF financing service. As part of the loan application process, you will need to share your sales data. If you are using one of the leading sales platforms (Shoper, Shopify, IdoSell and the like), you can probably do this using a built-in feature.
Based on your sales history, the company that is to provide your business with financing will conduct an analysis. Its result (specifically, projected sales) will determine whether you will receive the requested amount. Even if you don’t meet the conditions to get the requested financing, the lender may make alternative proposals to your company.
Example:
Ms. Hanna applies for RBF financing in the amount of PLN 125,000. However, a few hours after submitting her application, she receives a negative response – the lender offers a loan of PLN 100,000 instead. Ms. Hanna can decide whether she is satisfied with the lower amount or prefers to look for another financing provider.
Second – choosing the best offer
Nothing prevents you from seeking financing from more than one lender. This way you will receive more offers, which should then be compared in detail. When analyzing the proposals you receive, pay attention not only to the amount of financing, but also to:
- percentage of revenue that the lender requires,
- calculated sales forecast,
- estimated time of repayment of the obligation.
It may turn out that the loan company’s estimates will be too optimistic or, on the contrary, cautious. The final decision is up to you – remember that regardless of the projections, many things can happen during the course of repaying the loan that will affect how long you will repay the commitment (or, more generally, your company’s ability to repay).
Once you’ve decided on a particular offer, it’s time to sign the contract. Study the document carefully. Make sure that the terms in the contract are the same as the proposal the lender made to your company based on the application you sent.
Third – make repayment
The third point in the RBF financing process usually happens automatically. Your business, while earning, simultaneously gives back the borrowed amount to the lender – this is done by hooking up a card or company bank account. If your store’s revenue exceeds forecasts, you’ll repay the loan faster, giving back a regular percentage of sales. On the other hand, if sales drop significantly, you will also pay less. Thus, the repayment period will be longer, but the risk of being overwhelmed by installments is practically non-existent.
Example:
Ms. Hanna availed herself of financing in the amount of PLN 100,000, while agreeing to repay the obligation in the form of 8% of the company’s gross monthly revenues. In the first month, the entrepreneur’s company revenues amounted to PLN 64,000 (PLN 5,120 was credited to the lender’s account).
If Ms. Hanna had managed to maintain such sales, the entire obligation could have been repaid in less than two years (twenty months). Unfortunately, the very next month, the company’s revenue dropped to PLN 41,000 (the lender received PLN 3,280 of this). Ms. Hanna should monitor sales on an ongoing basis to estimate how quickly she will be able to repay the loan.
Summary
Revenue-based financing is an interesting form of financing for companies that do not want to lose control of their business, record high revenues, and at the same time dream of taking the company to the next level.
This is not only an opportunity for dynamic growth, but also a low-risk model – in the event of a stumble, financial problems or unforeseen complications (like a pandemic), the installment amount drops significantly. This makes the financial burden much less on the company than in the case of a fixed installment.
