In modern times, Revenue-Based Financing has come to light as a pretty convenient funding option for start-ups. The primary concept of revenue-based financing is that an investor will lend a company some money in exchange for a certain percentage of the total profit it yields. The investors will want payments periodically; until you fully pay the predetermined amount you agreed to compensate.
RBF doesn’t require you to put your equity holdings at stake by pledging an asset as collateral. In fact, the RBF allows entrepreneurs to arrange funds really quickly.
Benefits of Getting RBF
Apart from the accessibility and flexibility, here are some added advantages:
If your business succeeds, an Angel investor or a VC expects 10 to 20 times the returns making it more expensive than RBF. You can retain more control over ownership in the case of RBF. The institutions that provide RBF do not claim a position on your board of directors. In fact, they cannot place challenging financial covenants on it. The investors can invest in RBF but generally do not take equity, so there is no dilution in your ownership. If you take loans from a bank, you need to keep any of your financial assets, such as a house, car, etc. , as a guarantee. But with RBF, the matter is simple, your valuable assets remain with you, under your control. RBF doesn’t require a high credit score or past business experience. The proof of your ownership and past balance sheets will be enough to start the accessibility to your funds. You only need to make payments based on a percentage of your monthly revenue which ensures that your debt payment is always less than the monthly revenue. RBF allows investors and entrepreneurs to have a common interest in the early growth and success of the organization, as the investors will receive higher interest for higher revenues. They will do their best to provide genuine advice and help. RBF helps the investors to extend the cash runway allowing the company to reach higher valuations as it reaches its developmental milestones. It allows you to sell your company at any point in time. You can keep your business as long as you like, and there is no pressure to exit.
How does RBF work?
Suppose you need a massive sum immediately. You already have a pending debt to pay to your bank. So, getting the loan amount from your bank is out of the question. In a situation like this, you can opt for funding from the institutions that offer RBF.
The institution that gives out RBF will conduct a meticulous credit check of your company to decide whether or not it can offer you monetary assistance. It will further check the revenue forecast. After analyzing all the details, the clauses will be set on which they will lend you the money.
Is it the Right Time to Acquire RBF?
Whether you need RBF or not will solely depend on your situation:
If your business is witnessing slow growth. Check 6 months of your revenue data and see whether you can make the heavy repayments. If your company is witnessing fast-track growth, RBF might be the best option for you to arrange for the quick fund. The fund can act as the working capital that helps you expand without diluting the assets. If your company has a legit reason to seek RBF that can propel your growth, then go for this option.
Conclusion
RBF is flexible as far as its repayment options are concerned. However, it should be kept in mind that RBF might not be an ideal funding solution for you because if you are not sure where your business will take you, steer clear of this option. You should have adequate repayment capacity to take this risk.
