Under the Scope: Revenue-based finance

The Covid19 pandemic has affected every single business regardless of size and geography. Liquidity dried out on several layers and long-term investing, especially from venture capital (VC), has already started slowing down. The question then is: what other funding options do startups have? 

The economy has slowed down, but many digital businesses have seen demand grow and need resources to continue expanding. We’ve explored a few different financing options and compiled a handy primer on the ins and outs of Revenue-Based finance (RBF) – a fast, no-frills way to finance start-ups, expand business or boost marketing. Read on to find out what it’s all about and when it might be the right option for you.


What is revenue-based finance?

The quick answer: RBF means getting capital without giving away equity in your company (like with venture capital) or putting up collateral to secure a loan (like with banks). Instead, the revenue-based lender will issue a loan and tie its repayments to your net revenue. So, when you have a good month, you repay a larger slice of your loan, but when business is slow, repayments also go down. Importantly, the overall amount to be repaid always stays the same.

To determine whether your business is credit-worthy – and how fast you’ll likely be able to repay the loan – the lender uses a data-driven approach. The system analyses a wide range of business metrics, from bank balance to successful marketing activities, to assess the lending risk and predict your future revenue. Bonus: since this decision-making process is highly data-driven, you can expect an unbiased yes or no – and release of funds – within just a few days.


Okay, so how does this work in practice?

Too general or abstract for you? Let’s try an example. 

Say, you’re a start-up selling swimwear online. You’ve been up and running for a year or so, business is great and your numbers look encouraging, but to broaden your scope and grow, you’d like to invest more in marketing campaigns and amp up your ad spend. 

When you approach the revenue-based lender for a loan of €100.000, they ask for read-only access to your marketing data (e.g. Facebook Ads, Google Ads), online shop system (e. g. Shopify, WooCommerce) and banking info to get a comprehensive picture of your current marketing trajectory and cash situation. Once these numbers have been processed, an expert gets in touch for final validations. 

Because your numbers look solid, it takes them less than 48 hours to make you an offer. The resulting loan comes with a fixed fee of 6 percent (this is our fee), i. e. no matter how long your repayments take, your total liability remains exactly €106,000. 

Based on your past sales growth and earnings, the lender will set your repayment rate at, say, 10 percent of net revenue. So, depending on how well your business does, you could be through after 6-7 months.


What happens if my business hits a slump? 

Since seasonal businesses like swimwear brands might experience a sales spike in summer, but a sizeable slump during the chilly season. They are a great example of how start-ups can benefit from a revenue-based financing and repayment approach. 

During a period of strong sales, your takings go up – and you can afford to repay a larger part of your loan. But when everyone starts to shop for thick jumpers and thermal underwear, you can take the time to prep for your next successful season without worrying about sky high repayment targets.

This gives start-ups much needed planning-security and financial flexibility during times when traditional lenders or investors might start pressuring them for quick results. 


What are the obvious pros and cons compared to other financing options? 

Because revenue-based lenders need reasonable certainty that you’ll be able to repay the loan, this option is only available to start-ups and businesses with established cashflow and market track record of at least 12 months. You’ll need a proven product-market fit, a solid return on advertising spend, decent marketing margins and a healthy bank balance to pass the algorithm’s lending benchmarks.

At the same time, this is probably the fastest way to get a loan – without the need for collateral or equity. It also helps to know the full repayment amount, irrespective of the repayment period determined by your actual future revenues. 

For a more in-depth analysis of the benefits and drawbacks of different financing alternatives, take a peak at our focus feature on this important topic.