Your Complete Guide to Revenue-Based Financing

Written by Team 365 finance

Economy September 1, 2022

Looking for funding for your start-up? Revenue-based financing (RBF) is a new tool for small business growth. Rather than mandating a minimum monthly payment, RBF embraces the ups and downs of small businesses by offering a flexible financing arrangement.

Funding options for SMEs traditionally come in the form of traditional bank loans and seed capital from angel investors. Unfortunately, new businesses face barriers due to issues with cash flow and collateral. Therefore, compared to traditional debt models and equity funding, RBF is an efficient, innovative finance option for a start-up and SMEs that minimises debt risk.

If you’re interested in alternative funding options for SMEs, read on to learn more about revenue-based financing. We’ll outline how it works and how you can secure funding to help your business grow.

What is Revenue-Based Financing?

Revenue-based financing (RBF) is one of the lesser-known funding options for SMEs and occupies the middle-ground between traditional debt and equity financing.

In the debt model, banks and other lenders provide capital to SMEs but minimise the risk of lending via a minimum monthly payment. In the equity model, investors purchase shares and can receive dividends but dilute your control over the business.

RBF is a form of debt financing that incorporates the flexible repayment terms of equity financing. RBF lenders provide capital in exchange for a percentage of a business’s future revenue. Rather than presentations and paperwork, RBF lenders will look at your back-end systems to determine your projected revenue and find a reasonable repayment amount each month.

Crucially, the repayment is usually between 5-20% of your monthly revenue meaning it’s a relative (rather than fixed) cost. Therefore, RBF lenders receive a percentage of your revenue until the loan is repaid. This flexibility means business owners don’t have to stress about meeting fixed repayment sums and can always afford to repay their creditors.

Pros of Revenue-Based Finance

1. Quicker, Cheaper, Easier Funding Option than Angel or VC Funding

In RBF, there’s no expectation of 10x-20x returns, hyper-growth or large equity exits as in equity financing.

The RBF application process works similarly to a traditional loan: you provide some details about your business and lenders determine your eligibility.

2. No Personal Guarantees Required

Traditional lenders typically ask for collateral. Unfortunately for SMEs, sometimes they don’t have the assets available to offer.

Instead, RBF takes an entitlement of a portion of your future revenue as the guarantee, like equity financing, but only until the loan is repaid like debt financing.

3. A Low Credit Score or Little Credit History Isn’t a Barrier

In RBF, the loan application is linked to your business revenue history. Therefore, a poor credit score or low credit history isn’t a barrier to accessing finance.

4. Fluctuating Repayments

Repayments vary and are always based on a percentage of your monthly revenue.

As a result, repayments mirror your current cash flow, lowering your stress while running your business.

5. No Ownership Dilution for Founders and Early Equity Investors

RBF lenders also don’t take equity, require board seats or insist on financial covenants.

And so, you can retain ownership and control over your business and remain focused on what you want your company to do.

Cons of Revenue-Based Finance

1. Revenue-Based Eligibility

Of course, the financing is revenue-based, meaning that pre-revenue start-ups aren’t usually eligible.

Moreover, applicants must have a revenue history for a few months before applying to qualify.

2. Smaller Sized Funding

Typical funding amounts equate to 3 to 4 months of a company’s revenue, so especially large sums are uncommon.

However, RBF investors can offer additional loan sums in line with company growth allowing similar access to investment capital.

3. Monthly Repayments Required

Investors sometimes vote to defer dividend payments and re-invest money back into the company.

Here, as with bank loans, there is always a monthly payment owed in revenue-based financing. Fortunately, this amount is always in line with a company’s current financial status making it relatively easier to manage.

Merchant Cash Advance (MCA): An alternative Revenue-Based Finance option

A Merchant Cash Advance is a type of revenue-based funding for start-ups, offering quick, cheap and easy access to capital. But how is financing assessed?

At 365 finance, we work with your company’s current position and its growth vision. We look at your business’s credit and debit card sales to determine how much funding to offer.

We can fund up to 100% of your average monthly card sales. For example: if you process £10,000 per month in card sales, we offer £10,000 in funding. There are no APRs, interest rates or fixed terms. You make your monthly repayments through a small percentage of your future credit and debit card sales

To be eligible, you must process payments through a debit/card (PDQ) machine and/or online processor. Your business also needs to be trading for at least 6 months and process at least £10,000 per month.

Is Alternative Revenue the Right Opportunity for You?

While revenue-based finance is relatively new, it’s good funding for a start-up that has grown past the pre-revenue stage and is looking for financing without burdens like high monthly payments or managing a board. In particular, RBF is well suited to subscription-based businesses like eCommerce or software-as-a-service (SaaS) businesses.

Here at 365 finance, we can offer £10,000 to £400,000 in revenue-based funding for UK businesses. Apply for funding today without affecting your credit score or speak to our team to find out how we can help your business.

Discover more about how merchant cash advances grow your business here and click to apply for your tailored quote from 365 finance.