Revenue-based Financing: Origination and fee models

Revenue-based financing started gaining popularity by the end of 2021 when the VC funding was starting to dry up and the startup valuations had peaked. Startup founders got easily comfortable with the RBF product due to its quick turn-around time and non-dilutive nature.

Different RBFs have created a niche for themselves basis their client origination/target segment:

1) D2C E-commerce: D2C brands are businesses that sell directly to retail consumers and have their own e-shops or mobile apps. D2C businesses connect their bank accounts and payment processors (such as Stripe) directly to their RBF account and get funded basis the MoM revenue flow.

2) B2C and B2B Marketplaces: Marketplaces (such as Amazon, and eBay) host 3rd party merchants which sell their products to retail/institutional buyers. In addition to the bank and payment accounts, merchants also connect their marketplace accounts to the RBF account.

3) B2B SaaS Companies: B2B SaaS companies sell their recurring revenue contracts (receivables) to RBF lenders against upfront payment, thereby converting their MRR to ARR.

Since RBFs don’t charge a fixed interest rate from their clients. Different innovative fee models have emerged to suit the clients:

1) Upfront fee model: The borrower pays an upfront fee which can range from 5% to 20% of the loan application amount. For example, if the borrower makes an application for a $1m RBF loan, he would be disbursed $900k after deducting the upfront fee (assuming 10% in this case). The borrower would pay a % of monthly revenue until he repays $1m to the lender over the period of usually 6-18 months.

A 12-month $1m RBF loan with a 10% upfront fee generates an IRR of 19%, and not 10%! Why?*

2) Principle multiple model: The borrower repays 1.2x to 1.5x of the principal amount lent over the period of 6-18 months. For example, if the borrower makes an application for a $1m RBF loan, he would be disbursed $1m and would have to pay a % of monthly revenue until he repays the lender $1.3m (Assuming 1.3x principle multiple)

A 12-month $1m RBF loan with 1.3x repayment generates an IRR of 54%, and not 30%. Why?*

*Answer at the end of the article.

Several RBFs across the globe have been founded over the period and each of them has tried to create a niche for themselves basis their origination criteria and the customer segment they are targeting. Some of the notable RBF players with their target focus areas are:

Pipe (US, 2019) – SaaS, D2C

Wayflyer (Ireland, 2019) – D2C

re:cap (Germany, 2021) – SaaS

Uncapped (UK, 2019) – SaaS, D2C, and B2C Marketplaces

Clearco (Canada, 2015) – B2C Marketplaces

Outfund (UK, 2017) – D2C

Viceversa (Italy, 2021) - SaaS, D2C, and B2C Marketplaces

Karmen (France, 2021) - SaaS

Tapline (Germany, 2021) - SaaS

FLOAT (Sweden, 2022) – SaaS

Recur Club (India, 2021) – D2C

GetVantage (India, 2019) – D2C

*RBF is usually structured as an amortising loan. The weighted average outstanding balance in both cases is $574k and not $1m and the fee is charged on the original balance and not on the written-down balance. Hence, almost double IRRs.