Why Are CEOs Talking About Revenue-based Financing?

Last Updated:
April 20, 2022
Author:
Kay Nicole

Revenue-based financing

Revenue-based financing is all the buzz, but what exactly is it, and how can your startup take advantage of it?

If you’ve recently heard chatter about something called revenue-based financing (RBF), you’re not alone. COVID-19 has caused radical changes in the tech industry and market at large, leaving many venture capitalists to shift their priorities. In light of this, many startup CEOs have found it more difficult to secure venture capital funding and have instead turned to other options.

For those who have been finding it hard to get funding through more traditional methods, RBF might be a good choice. It allows you more freedom and ownership over your company unlike other financing options, such as Venture Capital (VC). Read on to learn more about revenue-based financing and why so many CEOs are talking about it.

What Is Revenue-based Financing?

Revenue based financing is a type of funding in which the lender takes a percentage of the company’s revenue as a way to repay the loan. It does not involve giving up equity, as venture capital funding demands, and it also has fewer restrictions than bank loans.

Bank Loans vs RBF

Unlike bank loans, RBF doesn’t require you to have a good credit score, cash reserves, or collateral in order to secure a loan, making it significantly easier for some startup owners to receive funding when they really need it. RBF also doesn’t require paying interest or repaying the loan by a fixed date, which makes it much less risky for the business owner.

Venture Capital vs RBF

While venture capital usually lends funds in exchange for equity in the company, RBF allows you to retain full ownership over your company, which can be extremely useful in ensuring your company goes the direction you want it to go in the future. Instead of repaying your lender in shares of your company, you repay with a percentage of your revenue.

Understanding Different Funding Options at Different Phases

Although revenue-based financing is a great option for many startups, whether or not it would work for you is dependent on several factors. A big component is what phase your company is in: pre-seed, seed funding, series A, series B, or series C.

Restrictions of RBF

In general, RBF requires that a company is already generating consistent and reliable revenue before it secures funding. Ideally, the company should also be showing signs of steady growth. This makes it a great choice for startups that have already been around for a few years and have settled into a more stable growth pattern.

However, for early-stage startups that are still pre-revenue, RBF wouldn’t be a good choice. Instead, these startups should focus on getting other types of funding, such as venture capital backing, bootstrapping, or bank loans. Once they establish a record of earning revenue, they can look to RBF as a way to supplement funding between VC rounds.

RBF may not be a good choice for startups that need a large sum of money all at once, though. Since RBF is more tied to current revenue than speculation of future growth, funds are offered in much more conservative quantities compared to venture capital.

The Landscape of Revenue-based Financing

Although a mix of bootstrapping and venture capital has been the traditional way for many startups to receive funding, this is changing rapidly, and RBF is increasingly taking a bigger hold over the tech world.

As of 2021, 134 companies, most of which operated in the SaaS industry, were able to secure revenue-based financing. This financing came from 32 different U.S.-based firms, and the total amount of capital that was offered through RBF is estimated at $4.31 billion.

The RBF space doesn’t show any signs of slowing down either — firms that offer this financing option are becoming bigger players in the financing field. For example, Novel Capital, a firm that specializes in offering revenue-based financing products, has recently secured $115 million in initial equity and debt funding.

Conclusion

Revenue-based financing is a great option for startups that cannot or do not want to settle for traditional venture capital, bootstrapping, or debt funding. Although it’s not perfect for every company, many companies who are at the right stage of growth can heavily benefit from such a financing option.

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