Revenue-based Financing

What’s an RBF?

RBF is a capital investment that is repaid as a percentage of the monthly revenue of the firm. In a way it’s like debt financing as there are monthly repayments, but different as there’s no fixed interest rate. The repayments fluctuate depending on the monthly revenue of the company.

Example of an RBF

• Company Monthly Revenue: $60k ($720k annualized)

• RBF Principal: $100k

• Payment: 10% monthly revenue

• Total Repayment: 1.5x of principal i.e. $150k

In the above example, the loan cap (the RBF principal) is set at around ~14% of the company’s annualised revenue and the loan is repaid as a percentage of monthly revenues. The total repayment is 1.5x of the principal which includes the fees charged by the RBF provider above and over the principal repayment. The repayment schedule for the above RBF example would look like the below assuming a nominal growth in the monthly revenues of the company.

Benefits of RBF

• No dilution: RBF doesn’t warrant a board seat or voting and economic rights over the company as is the case with the equity shares.

• No security: RBF doesn’t require any personal guarantee or collateral from the founder or the company as the share of revenue acts as a security for the RBF provider

• Flexibility in repayments: Since the re-payments are structured as % of Revenue, it allows for flexibility. Lesser revenue, lesser repayments, and vice versa

• Alignment of interest: Due to the revenue-sharing nature, the interest of both the RBF provider and the company is aligned. Hence, there’s no need of any financial covenants. Usually, the traditional lenders don’t encourage exorbitant topline growth as it also translates to an OpEx, and suboptimal cashflows.

Drawbacks of RBF

• Expensive, if re-paid quickly: If the company’s revenues grow faster than expected, it’s would end up paying a very high IRR on the RBF loan because the repayment is structured with an inbuilt fixed fee. Hence, the shorter the duration higher the annualized IRR

• Not for all companies: RBF product works well with companies having predictable/recurring revenues which makes SaaS companies particularly attractive for the RBF product.

Conclusion

RBF is growing as an alternative method to traditional debt and equity capital as it helps entrepreneurs with growing businesses to scale their companies without providing personal guarantees/collateral or diluting ownership. RBF product is structured purely based on actual cash revenues and as we say in debt, CASH is the KING!

We at Fasanara have partnered with several RBF lenders in the EU and the US and have supported them in building their portfolios. If you are working on an innovative FinTech Lending product, do reach out to us!