Revenue-based financing is a type of capital-raising method in which investors agree to provide upfront capital to a company in exchange for a certain percentage of the company’s ongoing total gross revenues. It is an alternative investment model that sits between equity and debt. Revenue-based financing is an attractive method of raising capital for companies and is becoming increasingly popular. Your monthly repayments will be attached to the performance of your business making the financing a variable cost rather than a fixed cost to the business. Furthermore, relative to debt and equity financing, revenue-based financing is a much easier process that requires less documentation.
Three parameters are usually agreed upfront besides the sum to be provided:
- The total amount to be repaid over time
- The percentage of revenue shared with the provider of financing
- The payment frequency (Usually monthly, weekly or daily)
Revenue-based financing seems similar to debt financing because investors are entitled to regular repayments. However, revenue-based funding does not involve interest payments. In a revenue-based financing investment, investors receive a regular share of the businesses income until a predetermined amount has been paid. Typically, this predetermined amount is a multiple of the principal investment and usually ranges between three to five times the original amounts invested. Also, in revenue-based financing, a company is not required to provide collateral to investors. In addition, there may not be a requirement from the investor for a board seat.
No requirement for collateral
No transfer of ownership stake to investors
Easier process, less documentation
You will need to be generating revenue on a monthly basis to qualify
You will also need to plan for a consistent reduction in your monthly revenue