What is Revenue Based Financing?
Revenue Based Financing (short: RBF) is an alternative form of financing that has been on the rise over the last few years. Since 2019, more than 18 RBF providers have been founded in Europe. While RBF is similar to a debt investment, the terms and requirements differ from a classic Venture Debt investment.
RBF is suitable for companies that generate a recurring revenue. Since the investment ist based on and secured by this revenue stream, most RBF providers do not require additional securities. Business models that commonly match these requirements are subscription-based business models such as eCommerce or Software-as-a-Service.
The key aspect of RBF, is that the borrower repays the loan in form of a revenue share. Therefore, the repayment period adjusts to the company's actual performance. This means that in case of a monthly revenue below expectations, the repaid amount is comparatively smaller, which leads to an extension of the repayment period. On the other hand, when the company exceeds its predictions, the repayment will be completed at an earlier time. Given that RBF is a quick but short-term financing solution the aspired payback period usually does not exceed a year.
When it comes to interests/fees, there are two different approaches: a capped and an uncapped method.
- Capped: The total amount to be repaid is capped at a maximum. This means that the borrowers total repayment obligation is limited to the amount of the original loan plus a fixed interest which is calculated as a share of the loan (e.g. X + 0.1X = 1.1X). Sometimes a discount is offered in case that the company completes the repayment faster than expected.
- Uncapped: Additional to the repayment obligation regarding the loan a fixed interest rate is set. Unlike the previous scenario, the interest rate is calculated monthly. Therefore the total payback amount increases once the revenue decrease and the payback period extends.
How does a RBF process look like?
- Intro: Unlike a usual VC fund, many RBF providers have a contact form, questionnaire or meeting scheduler directly on their website. To enable a time-efficient process some players even launched a fully AI-generated process and replaced any human interaction. However, most providers start the funding process with an introduction call to align expectations and discuss possible funding terms.
- Due Diligence: Since the center point of RBF is the recurring revenue of the borrower, the due diligence is focused on the company's financial situation. Other than a usual VC-fund, the RBF provider does not bet on a company's long-term success but on its short-term liquidity and ability to repay the loan. Therefore, no extensive market research is done and the whole process is comparably less time-consuming.
- Signing & release of funds: If the company matches the given criteria, the contract offer, signing and release of funds usually takes place without further delay. Having fully digitalized their process, some RBF providers work with AI-generated financing offers.
What are the use cases for RBF?
- Quick cash: RBF can be included in a classic VC round but is usually used as an additional uplift in between such financing rounds. Due to a short due diligence process and only limited customization of the contract, the release of funds can already take place between 48h and two weeks after the initial intro. This makes RBF a valuable liquidity source when quick and easy cash is needed.
- Scaling without losing equity: Equity investments usually come with strings attached. Although it can be beneficial to partner up with VCs and benefit from their knowledge and connections, every founder aims to stay in the driver's seat and hold on to a reasonable amount of shares. RBF providers unlock additional funding without taking board seats or interfering in operations. As mentioned before, RBF can be an effective measure in between two equity financing rounds. If the obtained money is used to boost the overall revenue, the company is more likely to achieve a higher, more beneficial valuation at the next funding round.
- High-risk loans without collateral: Unlike conservative banks, which set requirements often unattainable for startups, Venture Debt providers specialize on the need and abilities of young companies. Nevertheless, they always require collaterals, such as asset, share or account pledges, in order to secure their debt investment. Since some companies are unable or unwilling to align with these requirements, a Venture debt investment is not a suitable option everybody. RBF providers renounce such securities and therefore fill a market gap for this certain type of companies.
What are the typical RBF terms?
| _ | __ |
|---|---|
Loan volume | mostly between €10k and 2m (Europe) |
Fixed Interest
| 5-15% of the loan volume |
Payback Period | up to 12 month |
Monthly Repayment | between 2- 20% of the monthly revenue |
Collateral
| none |
Warrants
| none (no personal guarantees or hidden fees) |
Seniority | Senior debt (repayed first in an exit or an bankruptcy) |