The benefits of revenue-based finance
Entrepreneurs are known for being disruptive, innovative, and often underfunded. While venture capital (VC) funding has traditionally been the go-to source of capital for growing businesses, it comes with a significant downside: equity dilution. If you take on VC funding, you will be required to give up a portion of your ownership stake in exchange for the capital you receive, which can limit your control over the company's direction and future profits.
However, in recent years, an alternative funding model has emerged that aims to provide companies of all stages and sizes with access to capital without sacrificing equity – revenue-based finance (RBF).
RBF allows businesses to raise capital in exchange for a percentage of their revenue over a set period of time, without giving up any equity. This model has become increasingly popular among founders who want to retain control over their companies while still accessing the capital they need to grow.
But what are the benefits of choosing this model? If you're a startup founder looking for funding alternatives, read on to learn more about RBF and how it can benefit your business.
Benefit #1: No equity dilution
As we mentioned, one of the main advantages of RBF is that it allows you to raise capital without giving up any equity in your company. Equity dilution can be a significant concern for early-stage startups in particular but also applies to businesses in their more progressed stages too, as it can reduce your ownership stake and ultimately limit your control over the company's direction.
By contrast, RBF providers, like Outfund, will provide capital based on the company’s revenue and then receive a percentage of that revenue over a set period of time instead of taking equity. This means that you get to retain control over the company's decision-making and future profits while still accessing the capital you need to grow the business.
Of course, you might have a startup that isn’t actually a good fit for traditional equity financing and another benefit of RBF is that it can support this cohort of businesses. For example, startups that are not yet generating significant revenue or that have a slower growth trajectory may struggle to attract VC investors. RBF providers, on the other hand, can be more willing to invest in these companies based on their potential and projected revenue growth.
Benefit #2: Flexible repayment terms
Another advantage of RBF for growing businesses is its flexible repayment terms. Unlike traditional business loans, which typically require fixed monthly payments, revenue based finance companies can offer longer repayment periods, variable interest rates and the option to choose fixed or flexible repayments that are all tied to revenue growth.
Additionally, the repayment percentage is typically capped at a certain amount, meaning that your payments aren’t going to continue indefinitely. This helps avoid the pressure to pursue an IPO or acquisition in order to provide a return on equity investment.
Furthermore, RBF repayment terms can often be tailored to your company’s specific needs and growth trajectory. For example, if you take capital from Outfund and your business experiences slower revenue growth than anticipated, you will be able to make a lower repayment percentage. This flexibility ensures that your business can avoid cash flow crunches and prioritise sustainable growth, rather than being forced to prioritise short-term revenue at the expense of long-term success.
Overall, the flexible repayment terms of RBF can be a valuable tool for companies of all stages, offering a more sustainable and adaptable approach to financing than traditional loans or equity financing.
Benefit #3: Faster access to capital
The speed at which businesses who pursue RBF can access the capital is a big draw.
Traditional equity financing often involves a lengthy fundraising process that can take months, if not years. Revenue based finance, on the other hand, can be much quicker and more streamlined, allowing you to receive funding within days or weeks.
At Outfund, once you apply and connect your accounts to our system, we typically secure an offer of capital within 24-48 hours for our clients.
This fast turnaround time can be especially valuable for companies that need capital quickly in order to seize a growth opportunity or address a cash flow pinch. At Outfund, our team will always work with you to get the best possible offer as quickly as possible, to help keep your business moving forward.
When accessing capital through revenue based financing, most providers won’t ask for personal guarantees or collateral, which only further expedites the funding process.
Benefit #4: Alignment of interests
One of the most compelling benefits of RBF is the alignment of interests between the company being funded and the investor. Unlike equity financing, where investors are primarily focused on maximizing their return on investment, RBF providers only receive a percentage of the startup's revenue, which means that they have a vested interest in the company's success.
This alignment of interests can be especially valuable for startups that are pursuing a long-term growth strategy. With RBF, investors are incentivised to help your business grow its revenue over time, rather than simply focusing on short-term returns.
At Outfund, our team aims to bring strategic value to the table of every business we fund. This is done through a combination of industry expertise and access to networks and other resources. When you work with Outfund, we can connect you with experienced growth partners, specialist agencies and VCs so you can hit your long-term milestones. It’s about the bigger picture.
Benefit #5: Confidentiality
Confidentiality is a big draw for businesses pursuing RBF. If your business raises equity financing, you typically have to disclose a significant amount of sensitive information about your business to potential investors. This can include financial projections, product roadmaps, and other confidential information.
With RBF, on the other hand, companies do not have to disclose as much sensitive information. Because the RBF provider is only focused on the startup's revenue potential, they do not need access to as much proprietary information in order to make an investment decision.
This can be a major advantage for businesses that are concerned about maintaining confidentiality and protecting their intellectual property. By avoiding the need to disclose sensitive information to potential investors, companies can maintain greater control over their intellectual property and competitive advantage.
Benefit #6: Avoiding dilution
Finally, RBF can be a valuable financing option for businesses that want to avoid dilution. With equity financing, companies typically have to issue new shares of stock to investors in order to raise capital. This can dilute the ownership percentage of existing shareholders, including founders and early employees.
With RBF, on the other hand, businesses can raise capital without issuing new shares of stock. This means that existing shareholders can maintain their ownership percentage, which can be especially valuable for founders who want to maintain control over their business.
Additionally, because RBF does not involve the issuance of new shares of stock, you do not have to worry about managing a larger shareholder base or dealing with the administrative burden that comes with issuing new shares.
Grow your business with revenue-based financing today
If you are looking at your options for growing your business, you should carefully consider your cash flow needs, growth strategies, and long-term plans before pursuing your preferred financing option.
It is also important to note that not all RBF providers are created equal. Startups should do their due diligence and research potential RBF providers to ensure that you are working with a reputable and experienced provider that is aligned with their goals and values.
If you’d like to learn more about how RBF can help your business, reach out to our team at Outfund today to set up a call.