Revenue based finance – complete guide

Revenue-based finance can be an excellent tool for businesses looking to grow and expand. By providing access to capital without the burden of fixed debt repayments, businesses can use the funds to invest in growth initiatives, such as hiring new employees, developing new products or services, or expanding their marketing efforts.

Because the repayment of the financing is tied to the business’s revenue, investors have an incentive to help the business succeed, providing ongoing support and guidance to help it reach its full potential.

Additionally, revenue-based finance is often more accessible than traditional loans or equity investments, making it an attractive option for startups or small businesses that may not have a long credit history or a large asset base.

Overall, revenue-based finance can be an effective way for businesses to fuel growth while maintaining financial flexibility and control. Most start-ups have historically relied on debt and equity funding, but these options aren’t right for founders who don’t want to make personal guarantees or give away equity.

What is revenue based finance?

Companies receive capital in exchange for a percentage of their future revenues when they use revenue-based financing.  A certain percentage of a company’s revenue is expected to be repaid every month as a repayment of an advance. A company may agree to repay 6% of its revenue per month if it takes out a loan for £200,000, for example.

In months with higher revenue, the monthly repayment will be larger, and the repayment term will be shorter, while in months with lower revenue, the monthly repayment will be smaller, and the repayment term will be longer.

When determining how much to lend you, revenue-based finance lenders look at the financial history of your business. A pitch deck or a detailed business plan are not required, unlike other forms of startup funding – in fact, there’s usually very little paperwork.

Rather than making decisions based on your projected revenue, lenders connect to your back-end systems. Because of this, lenders are able to make funding decisions faster, rather than taking months to do so.

How does revenue based finance work?

There are three easy steps to Revenue Based Financing:

1. Sign up with an RBF provider

In the first step, you’ll connect your business’s financial accounts with a revenue-based finance provider (think Xero, Stripe, etc.). By doing this, the provider is able to view the financial history of your business and determine if you qualify.

Advances will be approved if your forecasted revenues are high enough. Different repayment terms will usually be offered to you.

2. Choose an offer

Providers charge flat fees and agree to share revenue monthly as part of the offer. As an example, here’s what that might look like:

Funding amount: £90,000

Monthly revenue-share: %6

Avg. Monthly revenue: £500,000

Approx. repayment term: 3 months

3. Repay the advance

It is calculated as a percentage of monthly revenues, which fluctuate on a regular basis. Company loans are repaid faster if they take more.

You will pay back less when you have slow months because slow months slow down your repayment.

How much Revenue Based Financing can you secure?

Your recurring revenue will determine the amount of money you can borrow from your finance provider.

The maximum loan amount for most companies ranges from three to seven times monthly recurring revenue (MRR) or annual recurring revenue (ARR). We lend between £10k and £300,000 at Uncapped.

Most repayment fees range from 6-12 percent of revenue, depending on whether the funds will be invested in predictable revenue-generating activities like advertising or high-risk activities like hiring.

‍The types of Revenue Based Finance

Typically, Revenue Based Financing agreements fall into two categories:

Variable collection

Revenue-based funding is most commonly based on variable collections. The loan amount is determined by the gross profits of the business, and the amount is repaid every month.

Flat fee 

There are some differences between flat fee funding and variable collection models. For up to five years, you commit to paying a fixed percentage of your future revenues – usually between 1-3%.

Early stage companies may find it attractive because the monthly repayments are lower than those in the variable collection model, but if you grow and scale quickly, you’ll wind up paying much more over time.

Revenue Based Financing in action

Suppose you had received £50,000 and were required to repay the advance by paying back 10% of your monthly sales.

You may see repayments like these with variable collection:

• Month 1: sales of £30,000 mean you pay back £3,000 of the advance
• Month 2:sales of $£0,000 mean you pay back £6,000 of the loan
• Month 3: sales of £15,000 means you pay back £1,500 of the loan

Your loan will continue to be repaid until it is completely repaid. The repayments will also decrease if sales drop for a few months, so you won’t have trouble repaying the loan.

A surge in revenue, however, will require you to pay a higher percentage and, therefore, a larger portion of your loan. By doing this, you will be able to reduce the repayment period significantly.

Revenue-based Financing for Startups

Revenue-based financing (RBF) is a financing model that has gained popularity among startups as an alternative to traditional equity or debt financing. In RBF, investors provide capital to startups in exchange for a percentage of the company’s future revenue, typically up to a certain multiple of the investment amount.

Unlike traditional equity financing, RBF does not dilute the ownership of existing shareholders, and unlike debt financing, it does not require regular interest payments or the pledging of collateral. Instead, RBF aligns the interests of investors and startups by providing investors with a share of the company’s revenue while allowing startups to maintain control over their equity and use their revenue to fuel growth.

This model can be particularly appealing for startups that are generating consistent revenue but may not have reached the scale or growth trajectory required to attract traditional equity or debt financing.

Revenue Based Financing vs other options

To choose the right funding option, you need to understand the difference between debt financing, equity financing, and revenue-based financing.

Debt financing

A debt financing model (like a loan) requires a business to repay a fixed amount with interest over a set period of time. Payments for revenue-based financing are for a fixed amount each month and must be made in full each month.

When start-ups apply for loans, they often have to provide a personal guarantee in case they cannot repay the loan. Venture debt, for example, has more complex repayment terms and default terms.

In a fluctuating market or if your turnover isn’t consistent, debt financing can be a high-risk method of securing huge cash injections. The benefits of revenue-based financing include not requiring personal guarantees, financial statements for years, or lengthy lead times.

Equity financing

To obtain growth capital, start-ups must give lenders a portion of their ownership. As a result of this financing model, there is a lower risk, but founders and directors lose ownership rights.

There is a possibility that you will lose influence over major decisions based on how equity is structured. Regardless, you will lose access to some of your profits.

As opposed to revenue-based financing, which does not require founders to give up equity, revenue-based financing requires equity from the company. Thus, equity financing is unattractive for founders hoping to generate predictable revenue (for instance, through Facebook ads).‍

Advantages of Revenue Based Financing

As we’ve already discussed, revenue-based financing is one of the best ways to raise capital when compared to debt and equity. Here is a complete list of its advantages.

Non-dilutive

The company is controlled by its founders and directors. Start-ups with rapid growth potential but needing cash injections to get there need that investment.

No personal guarantee needed

It’s less risky than traditional debt financing since founders and directors have no personal collateral to pledge.

Loan repayments are flexible

Performance-based repayments are made based on your business’s performance. A good performance will result in a higher payment. Paying less is the consequence of not doing well.

Consequently, ecommerce businesses don’t have to worry about a post-holiday slump, and service businesses are better prepared for lockdowns and whatever else the pandemic throws at them.‍

Fast-growing companies settle quicker

When a company grows faster than expected, its repayments are also quicker, so it gives up fewer revenues overall.

Cheaper than equity

It’s usually cheaper than investing with an angel investor or venture capital firm because repayments aren’t as high as interest.

Fast funding

In as little as 24 hours, startups can secure revenue-based financing. In the meantime, it takes months to raise VC funding.

Works well with other funding sources

By building traction, revenue-based financing makes other forms of funding more accessible and less costly for early-stage startups.

GRNDHOUSE, a fitness app based in the UK, raised revenue-based financing ahead of a seed round to grow its subscriber base. Raising £1.5m from investors meant they could negotiate better terms and give away less equity. ‍

Disadvantages of Revenue Based Financing

There are a lot of benefits to revenue-based financing, but it is not suitable for all businesses. Before partnering with a revenue-based financing company, there are a few things to consider.

Revenue required

It is important for lenders to take a close look at the revenue your business generates. It is possible that you will not be able to secure the funds you are hoping for if you are pre-revenue. Similarly, you may have an inconsistent financial history.

Smaller loan amounts

A loan’s cap is generally determined by your business’ MRR. Probably, if you’re a small company, you’ll only be able to get a loan that’s much smaller than what you could raise with angel investing. When your MRR grows, however, revenue-based investors may be willing to fund follow-on rounds.

Doesn’t suit long repayment periods

A bank loan might be a better option for founders looking for repayment periods longer than a year.

Funding short-term initiatives using revenue based financing is great for generating revenue that can be used to repay the advance. Nevertheless, a fixed-term bank loan becomes more cost-effective if repayments last longer than a year, for example.

Who can Benefit from Revenue Based Finance?

A few industries have the most to gain from revenue-based financing, but many types of businesses can benefit from it.

Ecommerce businesses

‍Those who sell products online should consider revenue-based financing, as it allows them to invest quickly in marketing and inventory.

Using the data from their business accounting and marketing accounts, lenders can forecast the performance of these companies.

Companies with seasonal performance

The performance-based nature of revenue-based financing is especially beneficial for startups that perform well during certain times of the year (such as e-commerce brands on Black Friday).

The revenue they make will enable them to pay off their loan quickly by stocking up on inventory and bolstering ad expenditures for peak season.

‍SaaS and subscription businesses

Companies that have predictable and consistent revenue are more likely to benefit from revenue-based repayments, which are based on MRR.

A SaaS or subscription business, for instance, receives monthly payments, so knows how much revenue to expect every month. They are able to make monthly payments due to this predictability, combined with low overhead.

Is Revenue Based Financing right for you?

You can use revenue-based financing to invest in initiatives that are very likely to drive revenue without dilution of equity or wasting time raising funds. With a flexible repayment schedule based on your revenue, you can continue to grow without worrying about meeting loan repayments.

Revenue-based financing can benefit any business owner looking to retain equity and grow quickly, regardless of whether you plan to use other sources of funding.

Frequently asked questions

What types of businesses are best suited for revenue-based finance?

Revenue-based finance is best suited for businesses with predictable revenue streams, as the amount owed to investors is tied to a percentage of the business's revenue. Therefore, businesses that have a proven track record of generating revenue, such as SaaS companies or subscription-based businesses, are well-suited for this type of financing.

How is revenue-based finance different from traditional loans?

Revenue-based finance is different from traditional loans in several ways. Unlike traditional loans, revenue-based finance does not require fixed debt payments or collateral. Instead, investors receive a percentage of the business's revenue until a predetermined repayment amount is reached. This means that businesses are not burdened with fixed debt payments and have more flexibility in managing their cash flow.

Conclusion

There are several reasons why a business owner might choose to use revenue-based finance. First and foremost, revenue-based finance offers an alternative to traditional loans and equity financing, providing access to capital without requiring the business owner to give up equity or make fixed debt payments. This can be particularly attractive to startups or small businesses that may not have a long credit history or substantial collateral to secure a loan.

Additionally, revenue-based finance is often faster and more flexible than traditional financing options, with a simplified application process and quicker approval times. This can be important for businesses that need to move quickly to take advantage of growth opportunities or address unexpected expenses.

Finally, revenue-based finance offers investors an incentive to help the business grow and succeed, providing ongoing support and guidance to help the business reach its full potential. Overall, revenue-based finance can be an attractive option for business owners looking for a flexible, accessible, and supportive source of funding for their growth initiatives.