Debunked: 6 Common Misconceptions About Revenue-Based Finance

A closer look at the reality of revenue-based financing and how it can help your business.

Revenue-based financing (RBF) is a relatively new and innovative form of funding that has gained traction among businesses in recent years. This alternative financing model allows companies to raise capital by committing a percentage of their future revenue to investors, providing a flexible repayment structure based on the performance of the business. Despite its growing popularity, there are still many misconceptions surrounding RBF that may deter business owners from considering it as a viable financing option.

Understanding RBF is crucial for entrepreneurs and business owners as it can offer unique benefits and opportunities for growth. In this blog post, we will debunk some of the most common misconceptions about RBF and provide insight into its true potential as a financing solution for a variety of businesses.

1. Is RBF only for startups?

One common misconception about revenue-based financing is that it is exclusively designed for startups. While RBF can indeed be a valuable funding source for early-stage companies, it is not limited to this particular segment of businesses.

RBF is a versatile financing option suitable for businesses across various industries, sizes, and stages of growth. Companies that demonstrate consistent revenue streams, scalable business models, and strong potential for growth can be ideal candidates for RBF, regardless of their stage in the business lifecycle. These could be:

  • Small and medium-sized enterprises (SMEs) looking to expand their operations or invest in new projects.

  • Companies that have outgrown traditional bank loans but may not yet be ready or willing to pursue venture capital or private equity.

  • Businesses with seasonal fluctuations in revenue, which can benefit from the flexible repayment structure of RBF.

How does it compare to other financing options?

RBF can serve as a complement to or substitute for other financing options, such as bank loans, angel investments, or venture capital, depending on the specific needs and goals of the business. The key difference between RBF and these other financing methods is that RBF focuses on the revenue-generating potential of a business, rather than the personal credit history of the owner or the valuation of the company. This makes RBF an attractive financing option for a wide range of businesses, not just startups.

2. Is RBF very expensive?

Another common misconception about revenue-based financing is that it is an expensive form of funding. While the cost of RBF may be higher than traditional loans in some cases, it is essential to consider the unique benefits and flexibility it offers to businesses.

The cost of RBF typically includes a multiple of the investment amount, which represents the total amount the business will repay over time. This multiple is usually negotiated based on the risk profile and growth potential of the company. Additionally, businesses agree to repay a fixed percentage of their monthly revenue until the agreed-upon multiple is reached. This structure provides flexibility, as repayment amounts can increase or decrease based on the company's revenue performance.

Traditional debt financing, such as bank loans, often requires collateral, personal guarantees, and a strong credit history, which can be challenging for some businesses to obtain. Additionally, loan payments are fixed, which can be burdensome during periods of slow revenue growth.

Equity financing, such as venture capital or angel investments, requires giving up a percentage of ownership in the company, which can lead to a dilution of control for the founders. In addition, equity financing becomes more expensive overtime as the company grows. As the the cost of the equity being shared increases in vale in perpetuity. RBF, on the other hand, is non-dilutive and allows business owners to retain control of their company.

Here are some factors that may affect RBF cost:

Business performance: Since RBF repayments are tied to revenue, businesses that perform well and generate higher revenues can repay the investment faster, potentially reducing the overall cost.

Risk profile: The perceived risk associated with a business can impact the cost of RBF, as investors may require a higher return on investment for riskier ventures.

Negotiation: The cost of RBF can be negotiated, allowing businesses to work with investors to arrive at a mutually agreeable repayment structure and multiple.

When evaluating the cost of RBF, it is important to weigh the unique benefits and flexibility it offers against the costs associated with other financing options. In many cases, RBF can provide a competitive and attractive funding solution for businesses seeking growth capital.

3. Does RBF limit business growth?

The third misconception we'll address is that RBF limits business growth. On the contrary, RBF can actually be a catalyst for growth when used strategically.

RBF offers a flexible repayment structure tied to a company's revenues, meaning businesses aren't burdened with fixed monthly payments that could stifle their growth. Instead, payments increase during periods of high revenue and decrease during slower periods. This structure can provide businesses with the financial breathing room they need to invest in growth initiatives such as research and development, marketing, or hiring.

For example, after getting £50,000 funding from Outfund, UK-based lingerie subscription company Lemonade Dolls was able to scale its operations and increase its market share after securing RBF. The flexible repayment structure enabled the company to invest heavily in marketing during its peak season, leading to a 4x increase in subscriptions and revenue growth.

Other companies we fund are often facing seasonal fluctuations. Using RBF, these businesses can maintain operational stability during off-peak periods. This allows the companies to focus on strategic growth initiatives without the pressure of fixed monthly loan repayments – although fixed payments are also an option with Outfund, if a business prefers this option.

Traditional debt financing can strain a company's cash flow due to fixed monthly repayments, limiting its ability to invest in growth initiatives. Equity financing may lead to pressure for rapid growth to satisfy shareholders' demand for high returns, which can sometimes lead to unsustainable business practices. In reality, far from limiting growth, RBF can provide businesses with the capital and flexibility they need to grow sustainably and strategically.

4. RBF requires giving up control of the business

Another misconception is that RBF requires business owners to relinquish control of their company. In fact, one of the key advantages of RBF is that it allows entrepreneurs to retain full control and ownership of their business.

Unlike equity financing, where investors acquire a share of the company and can influence its direction, RBF is a form of non-dilutive financing. This means businesses receive capital without having to give up any equity or control over their operations. The focus is on the company's revenue and growth potential, not on ownership stakes.

In RBF, investors receive a percentage of the company's future revenues until a predetermined amount is repaid. They do not gain voting rights, board seats, or any form of control over the company's decisions. Their involvement is primarily financial, not operational.

RBF is an excellent option for entrepreneurs who value retaining control of their business while securing the funding they need to fuel growth. The non-dilutive nature of RBF ensures that owners can continue to steer their business in the direction they envision without external interference.

5. Is RBF only for businesses with poor credit?

Some believe that RBF is a form of financing designed solely for businesses with poor credit. This misunderstanding may stem from the fact that RBF does not primarily rely on credit scores for approval. However, this does not mean that RBF is a financing option of last resort for businesses with poor credit.

Unlike traditional loans that heavily weigh credit history, RBF focuses more on a company's performance and growth potential. The main factors considered in RBF include the company's revenue trends, margins, market size, and business model viability.

While creditworthiness is not the primary focus in RBF, it doesn't mean that it isn't considered at all. A solid credit history can still enhance a business's credibility and may play a role in negotiation discussions. However, a less-than-perfect credit score does not automatically disqualify a business from securing RBF.

This is in contrast to traditional bank loans, which often have stringent credit requirements, making it challenging for some businesses to qualify. On the other side of things, venture capital and angel investors focus more on the potential for high growth and large returns, with less emphasis on credit history. RBF strikes a balance between the two, focusing on business performance and growth potential, making it a viable option for a wider range of businesses.

6. RBF is a last resort financing option

The final misconception we'll tackle is the belief that RBF is a last resort financing option. This is far from the truth. In fact, RBF can be a strategic choice for many businesses seeking growth capital at any stage.

Its flexible repayment terms, focus on business performance rather than credit history, and non-dilutive nature make it a viable and attractive choice for many businesses. In fact, some companies may turn to RBF as a first option due to these unique benefits:

  • When a business has consistent, predictable revenues and can comfortably allocate a percentage of future revenue to repay investors.

  • When a business owner values maintaining control and ownership of their company.

  • When a business is in a high-growth phase and requires flexible financing to fuel this growth.

  • When a company operates in a sector with strong margins and scalable business models, making them ideal candidates for RBF.

When it comes to seeking RBF, it’s a matter of understanding the unique benefits it offers and how they align with the specific needs and goals of the business.

The true potential of revenue-based financing

In this post, we've debunked some of the most common misconceptions about revenue-based financing (RBF), from the belief that it's only suitable for startups, to the misunderstanding that it's a last resort financing option.

  1. RBF isn't just for startups; it's a versatile financing option for businesses at various stages of growth.

  2. While the cost of RBF may seem higher than traditional loans, the flexibility and unique benefits it offers can make it a competitive and attractive funding solution.

  3. Far from limiting growth, RBF can actually provide businesses with the capital and flexibility they need to grow sustainably and strategically.

  4. RBF allows entrepreneurs to maintain full control and ownership of their business, a key advantage over equity financing.

  5. RBF is not exclusively for businesses with poor credit; it focuses more on a company's performance and growth potential.

  6. RBF is not just a last resort financing option; it can be a strategic choice for businesses seeking growth capital, offering unique benefits that align with their specific needs and goals.

Understanding RBF and its potential benefits is crucial for entrepreneurs and business owners. It can offer unique opportunities for growth, flexibility in repayments, and allow business owners to retain control of their company. As with any financial decision, it's important to thoroughly research and consider all available options. RBF, when understood correctly, can be an excellent financing tool that can support and empower businesses at various stages of growth.