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Revenue-based financing is a model for raising funds based on the ongoing revenues of the company. Simply put, a company can pledge a part of its annual revenues in return for growth capital. Typically, early-stage ventures and even SMEs nowadays prefer revenue-based finance as they can get access to funds without any form of collateral or equity dilution. It is considered to be a good source of capital rising for the smaller businesses as it is likely that the quantum of funds they might be looking at would not be significant and the VCs would not entertain pitches or proposals for such fund requirements.
There are firms that specialise in revenue-based financing. To start with, these companies look at parameters like revenues, cash flows, operating margins, scalability and growth potential among other things as part of their due diligence. Once convinced with the potential borrower’s prospects, they lend the required capital at a mutually decided rate of interest or fee. Interestingly, this is quite similar to how an angel investor or even a VC would function, but what makes revenue-based financing different is the manner in which the funds are repaid by the borrower. The borrower commits to sharing a part of the business revenue with the lender. In other words, both the principal and the fee or interest that the lender charges, is returned from the revenues that the company earns during the normal course of the business.
Here are the characteristics of typical revenue-based financing,
Here are the top five benefits of revenue based financing:
1. Cheaper than Equity
With expectations for 10X-20X returns, Angel and VC funding are the most expensive sources of capital possible if your startup is successful.
2. Retain more Ownership & Control
When it comes to revenue-based financing (RBF), investors generally do not take equity. As a result, there is no ownership dilution to founders and early equity investors. In addition, RBF investors do not take board seats or place difficult financial covenants on a company. Founders are able to maintain control and direct the company towards their vision.
3. No Personal Guarantees
Bank loans require personal guarantees from founders based on the high-risk nature of startups. This requires founders to put their personal assets, such as a house or car, on the line. Founders can breathe easier under RBF knowing that no personal guarantees are required.
4. No Large Payments
Monthly payments are based on a percentage of your monthly revenue. This means if you experience a bad month, your monthly payment will reflect that and you are not burdened with a large payment you can’t afford.
5. Faster Funding Timeline
Pitching to venture capitalists can take anywhere from months to years before securing a deal. Since RBF investors do not require companies to achieve hyper-growth or large equity exits, lenders can provide funding in as little as four weeks.
1. Revenue Required
Because this form of financing is revenue-based, pre-revenue startups are generally not a fit. A revenue-based investor uses metrics such as MRR/ARR and growth projections to determine eligibility for a loan.
2. Smaller Check Sizes than VCs
Venture Capital is known for shoveling out enormous amounts of cash for companies, even if they are pre-revenue. Investors in RBF deals will not provide capital that is worth more than 3 to 4 months of a company’s MRR. However, RBF investors may choose to provide follow-on rounds as a company grow, providing entrepreneurs access to more capital over time.
3. Required Monthly Payments
RBF requires monthly payments unlike equity financing. Startups may find themselves tight on cash, so it is crucial to take on a healthy amount of revenue-based financing that aligns with the company’s financial status and plans.
1. Bank of Baroda
Bank of Baroda (BOB) is a renowned public sector bank that offers business loans and MSME loans to self-employed professionals, MSMEs (Micro, Small and Medium Enterprises), corporates and business owners. Various other types of business loans offered by the Bank of Baroda are Working Capital, Term loans, MSME loans, Bill discounting, Overdraft, etc.
Omozing helps make Smart Money Moves for a Lifetime. They strive to get lowest interest rates and best terms for your Online Applications at www.Omozing.com . We’ve made business lending smarter, faster and easier by transforming the approval process from stumbling blocks to stepping-stones. This enables borrowers to not just get access to capital, but also understand what areas they need to work on in order to enhance their credit profile. Omozing ensures that Borrowers get a secure, safe and reliable application process that be tracked online.
3. ICICI Bank
ICICI Bank is a leading private sector bank in India. It caters to individuals, startups, as well as existing businesses and offers business loan interest rate from 18% onwards per annum.