Revenue based funding is a unique financing model that lets you raise funds without diluting equity or providing collateral. There’s no headache of a fixed monthly instalment or tenure. You pay a percentage of your future revenues till you repay the entire capital plus a small fee.
Pros and cons of revenue based financing
The most significant benefit of revenue-based funding is the non-dilution of equity. As a result, founders keep complete control of their business, always. In addition, as revenue-based financing firms rely on your online store data and do not require personal guarantees and collateral to release funds, you can get the capital faster than the traditional alternatives like VC funds and angel investors. For instance, we at Velocity, disburse funds within seven days of your application without delay!
Another benefit is businesses don’t have to worry about the fixed interest linked to the loan, as repayments are connected to the percentage of their monthly revenue. It prevents the burden of large payments in cases when you can’t afford them.
There is no drawback of revenue-based financing for growth-stage startups, but it is critical to know what kind of financing needs are best met with RBF. If you are looking for working capital to meet your marketing and inventory needs, revenue financing is the way to go but if you are looking for funds to expand into new geographies or to invest in the R&D of a new product, VC funding might make more sense.
Is revenue based funding a good fit for your business?
Here’s a 5-point checklist. If your business ticks all the boxes, revenue based funding might be the perfect financing model for you.
1) Transparent online revenues
The capital you raise and your repayments are linked to your revenues. Hence, they should be online and easily trackable. This is a prerequisite of most revenue based financiers, as they rely on your online data to make the funding decisions.
2) Healthy gross margins
A portion of your future revenues will go towards repayment. So, your business should have healthy gross margins of at least 30%.
3) Positive RoAS
RoAS stands for return on ad spends. An RoAS of over 2x means your digital marketing spends are generating over two times revenues to recover marketing and other direct costs.
4) Repeatable working capital cycles
Marketing and inventory are examples of such cycles. They become predictable after a while and can be funded using revenue based funding.
5) Working capital end-use
Revenue based loans are best suited to fund revenue-linked expenses such as digital marketing and inventory.
To make a fair comparison knowing when the revenue based funding is not the right fit for your business is equally important. Our next section will help you understand which kind of businesses should not apply for revenue based funding.
When is revenue based funding not right for you?
1) You’re too early in your journey
Revenue-based funding is ideal for businesses that have at least 6-12 months of revenue history. Startups need some time to establish a repeatable working capital cycle. If you are still testing your product in the market and do not have enough revenue history, we suggest focusing on acquiring customers before applying for revenue-based funding.
2) Your business is offline
As talked about earlier, most revenue based financiers cater to internet-first businesses with trackable revenues. If your business is offline, revenue-based funding might not be the best option for you.
3) You need funds for CAPEX
Revenue based loans cannot be used to fund capital expenditures and long-term projects such as research and development. You should look for VC funding opportunities in such cases. The article written by my colleague Megha on how to find the right financing for your business will help you understand the various financing options available.
So, is revenue based funding right for your business? We hope this article helped you answer that question.
About Velocity’s Revenue Based Financing
We have pioneered revenue-based financing for online businesses in India. The idea stemmed from the fact that venture capital (VC) and bank loans may not be lucrative options for many of these businesses. VCs take a significant chunk of equity and thus, business control. Banks need collateral or personal guarantees, take time and look for multiple years of profitability. These conditions are not very founder-friendly.
We provide a non-dilutive, collateral-free alternative to such businesses. Based on their online sales and revenue data, we offer growth capital of up to Rs. 3 crore up-front. This capital can be deployed to fund repeatable revenue-linked expenses such as digital marketing spends, inventory costs, etc. For further insights into revenue-based finance and to explore the advantages of RBF for your company, simply follow this link.