A guide to Revenue-based financing
Updated: Aug 10, 2021
Our first dive into Funding options outside Venture Capital, will be on Revenue-Based Financing (RBF), and will be part of a series of articles exploring alternative financing options for startups, who may not meet the typical VC-backed profile.
RBF, in some form, has been around for decades and has historically been used by the oil & natural gas, pharmaceutical and movie production industries. More recently, this type of financing is now being used to fund startups; financing their R&D, marketing or overseas expansion.
What is it and who is eligible?
RBF is a form of finance where capital is provided in exchange for an agreement to pay a fixed percentage of future revenues to the lender until the invested amount, plus a fee, have been repaid. Typically there are no equities, personal guarantees or hidden fees involved which makes it attractive.
Companies can borrow between £10,000 and £1 million, depending on their last month’s revenue, and may qualify if they:
Generate digital revenue which exceeds £10k per month
Can show sufficient revenue data (usually over 9 months)
Can show positive unit economics
Have a plan on what to do with the funding
RBF providers usually take you through a diligence process to determine whether or not you are eligible and quickly get back to you on their decision.
How does it work?
The funding provided is based on historical and projected revenues from your business. If eligible, you will need to connect your data sources (typically your CRM, bank data, Xero and marketing accounts) to the provider’s prediction engine. Depending on your sales metrics, you will be able to access additional tranches of capital as you grow, rather than via a lump sum.
Repayment of the loan will be set at a fixed percentage of your future revenues each month, plus a fee on the amount borrowed (the interest). The repayment structure allows your business to cope with revenues fluctuations, and typically there is no specific repayment date or late payment fees. The fee applied to your repayment will depend on the provider - some charge a fixed fee, whilst others charge you more if you are more established.
The total amount repaid depends on whether the provider uses a:
Multiple approach: You will repay the loan amount plus a multiple (also called the “cap”) of the initial capital, usually between 1.5x and 2.5x
Uncapped approach: You will repay the principal amount plus a fixed fee.
A worked example
Let’s assume your monthly revenue is currently £50,000. You want to borrow £100,000. Under the multiple approach capped at 1.25x, you will repay £125,000. Under the uncapped approach (fixed at 6%), you will repay £106,000. Both repayments will be spread based on your future revenue.
Benefits
Fast: It is significantly quicker to get money. You apply in minutes and receive the funding in days.
Flexible: If your revenue slows down, so do your repayments
Less risky: you don’t give any equity or control to external investors, nor are there any personal guarantees.
Transparent: The option is transparent regarding what founders will have to pay to reimburse the loan, there are no hidden payments.
Challenges
Fees: It can be more costly than traditional loans, especially using the “multiple” system. However, bank debt can be very difficult for startups to obtain given established banks’ conservative approach to lending.
Limited amount: It adapts better to earlier stages of startups. The total funding available typically doesn’t exceed £1m.
Different providers have different terms and conditions. Make sure you understand all the specificities of the loan agreement. Some agreements may include exit fees in the case of change of control.
How do you access it?
In Europe, Round2 Capital Partners, founded in 2017 and based in Vienna, pioneered the revenue-based financing solution, using the multiple system. They lend up to 30% of annual revenue, with repayment caps between 1.35x and 2.15x and repayments ranging from 2%-6% of a business’ monthly revenue.
Founded in 2019, Uplift1 is the first Germany-based revenue-based finance provider which can lend up to £500k or 4x of monthly revenue, with flexible repayment terms. They also follow the multiple system.
The key players using the ‘uncapped’ approach (which typically have lower fees) are Uncapped, who was founded in 2019, and is the first pan-European revenue-based finance provider of the style, as well as Just Capital, Forward Partners, Forward Advances, and Pulse also launched initiatives earlier this year.
“We provide a cost effective, unsecured, fast and flexible financing solution for European startups”
says Jamie Whitcroft, Head of Strategic Partnerships at Uncapped.
“Founders can now scale their businesses without giving away equity or control of their companies. We’re excited to be pioneering this new type of finance as Europe’s first revenue-based finance provider”
Nathan Pamart, founder of Pulse, sees revenue-based financing as a
“non-dilutive solution for founders who are looking to reduce the time they spend fundraising and with more flexibility than debt . RBF is a complementary way to finance your business alongside a VC round, or even for bootstrapped businesses in growth mode. Pulse is focusing on SaaS businesses where we see an opportunity due to the recurring nature of revenues.”
As is often the case, this type of financing has been available for many years on the other side of the Atlantic with players including US-based Lighter Capital (2012), SaaS Capital (2007) and Canadian-based Clearbanc (2015).
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