Revenue-based financing (RBF) is a type of financing that uses a company’s future sales as collateral. It’s a type of financing that allows companies to access capital upfront by selling future revenues instead of selling assets or equity.
In exchange, the business agrees to pay back a percentage of its monthly revenue over a set period. Additionally, it provides access to cheaper capital with quicker disbursal and fewer restrictive covenants than bank loans and venture capital.
How does Revenue Financing work
Revenue Financing is an excellent option for businesses with limited access to capital or whose cash flow needs cannot be satisfied by traditional methods such as banks or investors.
The process will vary depending on what type of revenue financing is being used, but there are several common steps involved in this kind of transaction:
Sign up with an RBF Provider
The first step in this process is to sign up with an RBF provider. To qualify for a revenue advance from a financier, you’ll need to give them a copy of your financials and sales data.
Choose an Offer
Next, you’ll review the offers from various financers and select the one that suits your business needs.
Repay the Advance
Once you’ve chosen an offer, you’ll sign a revenue advance agreement (RA) with your financier and repay the advance accordingly.
Types of Revenue Financing Agreements
There are two main revenue agreements: Through these agreements, the financier will provide you with an advance against future sales. You’ll then owe a percentage of those future sales to the financier. In return, the financier receives a percentage of the future sales from the advance.
In this type of agreement, the financier receives a percentage of the future sales that you receive. This includes the initial sales and any additional sales resulting from the original sale. If you sell as part of a recurring subscription, the financier also receives a percentage of each new subscription payment.
In this type of agreement, the rate that the financier receives doesn’t increase if your sales increase. This is most common when the financier wants to protect themselves against increased future sales.
Revenue Financing vs. Debt Financing
Revenue Financing is different from debt financing, where you take out a loan from a bank, private equity fund, or other lenders. In debt financing, you agree to pay back the total amount of the loan. In revenue financing, you agree to pay back a percentage of your future sales.
Revenue financing also differs from equity financing, which is when you sell shares in your company in exchange for capital. With equity financing, you give up ownership of your company in exchange for money. Because of this, revenue financing is often preferable to businesses that want to remain a private, autonomous companies.
Is Revenue Based Financing Right for you
Revenue financing is an excellent option for young, growing companies with steady cash flow and looking to get cash upfront. It is also a great alternative to equity financing, giving you access to capital without giving up equity.
When choosing a revenue financier, make sure you understand what type of agreement they are offering. You should also analyze your future sales to determine if you can repay the advance based on the terms of the deal.
Revenue-based financing is an excellent choice for businesses that want to grow fast but don’t want to compromise on their cash flow. It provides businesses with capital upfront and is often less expensive than equity financing. Revenue financing is a good option for young, growing companies that want to access cash upfront without giving up equity.
- How does revenue-based financing work?
Revenue-based financing is a type of credit that is obtained by leveraging projected earnings. Borrowers must guarantee a certain percentage of their income to the investor or lender, commonly known as revenue share. They must then repay the lender the principal amount plus the revenue portion.
- Is revenue-based financing a loan?
Both debt and equity financing are not the same as revenue-based loans. Debt financing has a higher risk because the loan amount must be repaid by a specific date, whereas equity financing has no predetermined deadline and dilutes firm shares to lenders.
- Do banks offer revenue-based financing?
Bank loans with interest rates, equity financing, and debt financing are all alternatives. Revenue-based financing should be your first alternative for raising finance with our personal guarantee if you need a big capital infusion and your firm has reliable monthly revenue streams.