What is revenue-based finance and how does it work?
Learn how you can use revenue-based finance to grow your business.
When running a business, having access to financing is a critical component of success. Whether you are just starting out or looking to expand, having the capital to invest in your company's growth can make all the difference. However, traditional funding options like venture capital or bank loans are not always the best fit for every company, especially those with a predictable revenue stream. This is where revenue-based finance comes in.
Revenue-based finance is a funding option that has grown in popularity in recent years. Rather than taking on debt or giving up equity in the company, revenue-based finance provides funding based on a percentage of the company's monthly revenue. This means that companies with a consistent revenue stream can access financing without sacrificing ownership or control.
This type of funding provides real flexibility for business owners. By exploring this financing option, you may be able to access the capital you need to grow your business and take it to the next level. So, let's dive in and explore what revenue-based finance is and how it can benefit your business.
What is revenue-based finance?
Revenue-based financing, also known as RBF, is a type of financing where a company can access capital based on a percentage of their monthly revenue. Unlike traditional financing options, such as bank loans or venture capital, revenue-based financing does not require the company to give up equity or take on additional debt. This means that the company can retain ownership and control over their business while still accessing the capital they need to grow and expand at a pace which their market(s) demand.
Traditional funding options like bank loans and venture capital typically require a significant amount of collateral or look for a high level of growth potential to secure funding. This can be a challenge for some companies, especially for startups and small businesses. Additionally, RBF can be a good option for companies that may not have a long enough credit history or a strong enough balance sheet to qualify for traditional forms of financing.
Accessing revenue-based financing is relatively easy in comparison to other financing routes. All you have to do is apply online, or for more information message us on live chat and one of the team will guide you through the process.
Typically, you will need to provide information outlining your monthly revenue by connecting your existing banking or payment system accounts. Based on this information, your capital provider will be able to generate an offer that represents a percentage of your monthly revenue – this usually ranges from 3-12%, depending on your chosen capital provider.
Once the financing is approved, the capital provider will receive a percentage of the company's monthly revenue until the financing is repaid in full. The repayment terms are typically structured to be flexible and can be customised to meet the needs of the company. This can include longer repayment periods or a percentage-based repayment plan that is tied to revenue growth.
For example, at Outfund, all you need to do is securely connect your existing banking and payments systems for our team to analyse your revenue data in realtime. Once this is done you will receive a tailored offer ranging from £10K to £10M within 48 hours. Then it is up to you to choose the offer that best suits your business needs. When it comes to repayments, this can be done via a flexible revenue share as your daily sales come in. That way, if revenues slow, so do your repayments. Or if you prefer predictable repayments, you can choose to have a fixed repayments option as well.
Revenue-based financing is often used to fund specific growth initiatives like marketing or to bridge financing gaps between funding rounds. It can also be used to finance the purchase of equipment or to cover other capital expenditures, like software or payroll subscriptions.
The Benefits of Revenue-Based Finance
So other than being easy to access, one of the key benefits of revenue-based finance is its flexibility. Unlike traditional funding options, this type of financing can be truly customised to meet the specific needs of your company through things like longer repayment periods, variable interest rates, and repayment plans that are tied to revenue growth.
It is this level of flexibility that has continued to attract businesses to choose RBF over other financing options in recent years. In fact, The global Revenue Based Financing market size was recently valued at $2823.98 million and is expected to reach USD $48982.49 million by 2029. That is a staggering compound annual growth rate (CAGR) of almost 61%.
No need to dilute your equity
Another distinct advantage of RBF over traditional equity financing is that it does not require companies to give up a portion of their equity in exchange for funding. This is particularly beneficial for companies that want to maintain full ownership and control over their business.
For smaller or younger companies, revenue-based financing can be an attractive financing option because it allows them to access the funding they need without sacrificing ownership or control. This can be particularly beneficial for businesses that are not yet ready to raise a traditional funding round or those that want to maintain a strong ownership position.
Furthermore, by not diluting equity, companies can maintain their long-term growth potential. With traditional equity financing, every time a company raises a funding round, the value of existing equity is diluted, which can make it difficult for early investors and founders to maintain a meaningful stake in the business. Revenue-based financing, on the other hand, allows companies to maintain the same ownership structure throughout the financing process.
Get funding faster
Speed is one of the big attractions to revenue-based financing. It’s usually a much quicker and less cumbersome approval process.
This is especially advantageous for companies that need capital quickly to take advantage of growth opportunities. With revenue-based financing, companies can receive funds within a matter of days, allowing them to act on opportunities as they arise. For example, at Outfund, we typically generate offers within 24hrs.
Repayment terms on your terms
Revenue-based financing also offers tailored repayment terms that can be customised to meet the specific needs of your company. This can include longer repayment periods, variable interest rates, and the option of fixed or flexible repayment plans that are tied to revenue growth.
This flexibility means that you can structure your financing to align with growth plans and revenue projections.
Shared success
One of the less acknowledged benefits of this type of funding is how the capital providers can actually share in the success of the companies they fund. This can include profit-sharing agreements or other incentives that provide capital providers with a stake in the company's success.
This shared success can create a strong alignment between the company and the capital provider, as both parties have a vested interest in seeing the company succeed. This can lead to a more collaborative and supportive relationship between the capital provider and the company.
Who is a Good Candidate for Revenue-Based Finance?
While revenue-based financing is a great option for a wide range of companies, including both young and established businesses, it is a particularly good option for companies with a strong recurring revenue stream, such as Software as a Service (SaaS) companies, e-commerce businesses and other subscription-based models.
However, there are two key things most capital finance providers will look for in all applications:
- Predictable revenue stream
- Clear growth plan
Why you need a predictable revenue stream for revenue-based financing
The reason providers look for a predictable revenue stream is because this is what they will typically base their loan offer amount on. It’s usually generated on a percentage of the company’s monthly revenue. Companies with irregular revenue streams or those that are not yet generating revenue may not be good candidates for this type of financing.
How a clear growth plan can help secure revenue-based financing
As well as a predictable revenue stream, a clear growth plan shows your provider how you intend to use your finance and how this will in-turn aid in repayments. It can also help to identify when your business may need or be eligible for top-up funding.
For example, at Outfund, we offer top-ups on funding once 33% of your original amount has been repaid.
How can revenue-based finance be used?
If you’re weighing up whether or not your business could benefit from revenue-based finance, here are a number of ways it can be used:
Growth capital: RBF can be used to fund your growth initiatives, such as expanding product lines, entering new markets, or increasing marketing and sales efforts. Working capital: You can also use this type of funding to cover short-term cash flow needs, such as paying suppliers or covering payroll. Bridge financing: RBF can also serve as a bridge between funding rounds, providing your company with the capital it needs to continue operating until it can secure more traditional financing.
It’s also worth noting that on top of offering finance itself, a lot of RBF providers can bring strategic value to the table, such as industry expertise or access to networks and resources, which can be valuable for a growing company. For example, at Outfund, we can connect you with growth partners, specialist agencies and VCs so you can hit your long-term milestones.
Take a look at how Onto used RBF from Outfund to help fuel growth
Onto is a subscription electric car company founded in 2018 by co-founders Rob Jolly and Dannan O’Meachair, with a mission to provide a more accessible and affordable way for people to switch to electric cars.
They came to Outfund as the company had a large backlog of orders and needed funding to expand their fleet of electric cars. Outfund was able to provide £340K as a 1st facility to meet immediate needs, and continues to provide ongoing capital to meet specific growth projects.
Since Onto joined Outfund, they have been growing at an exponential rate, and the company now owns the UK's largest fleet of electric vehicles, which has enabled the business to supercharge its growth. Rob is extremely excited about Onto’s growth since they joined Outfund:
“We have doubled in size in the last quarter and are due to double in size again this quarter!”
Supercharge your growth with revenue-based finance
So through flexibility, fast access to capital and tailored repayment terms, revenue-based financing is quickly becoming the preferred option for fuelling business growth today.
While revenue-based financing may not be suitable for all companies, those with a predictable revenue stream and a clear path to revenue growth should consider it as a viable financing option. By leveraging revenue-based financing, these companies can access the capital they need to fuel their growth quickly without sacrificing ownership or control.
As with any financing option, it is important for companies to carefully evaluate the pros and cons of revenue-based financing before making a decision, of course. While it can provide fast access to capital and tailored repayment terms, it can also be more expensive than traditional loans, depending on your provider.
Additionally, companies should ensure that they have a clear understanding of the repayment terms and the impact that they will have on their cash flow. It is important to work with a capital provider that is experienced in revenue-based financing and that can provide guidance on how to structure the financing in a way that is beneficial for your company, like Outfund.
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To learn more about how revenue-based finance can help you grow your business, apply online in 5 minutes and receive your offers in 24 hours