Why is it in the News?

Revenue-based financing (RBF) is increasingly popular among startups and digital SMEs due to a lack of venture capital and limited access to traditional credit options.

What Is Revenue-Based Financing?

• Revenue-based financing is a method of raising capital for a business from investors who receive a percentage of the enterprise's ongoing gross revenues in exchange for the money they invested.
• In a revenue-based financing investment, investors receive a regular share of the business's 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 amount invested.

How Revenue-Based Financing Works?

• Capital investment: An investor or a group of investors provides capital to a company (but not as a traditional loan nor in exchange for equity in the company).
• Revenue percentage agreement: In return for the capital, the company agrees to give the investor a fixed percentage of its gross revenues each month.
• Repayment structure: The company repays the invested capital through payments based on monthly or annual revenue.
  • The amount paid each month varies as it is directly tied to the company’s revenue for that month.
• Repayment cap or term: There is usually a cap on the total amount to be repaid, often set as a multiple of the original investment (e.g., 1.5x or 2x the initial amount).
  • Alternatively, the repayment might continue until a specific term is reached, such as a number of years.

Comparing Revenue-based Financing to Debt and Equity-based Models:

• While revenue-based financing shares similarities with debt financing in terms of regular investor repayments, it differs notably as it doesn't involve interest payments.
• Instead, repayments are based on a predetermined multiple, yielding returns higher than the initial investment.
• Moreover, unlike traditional debt arrangements, revenue-based financing doesn't necessitate collateral.
• Additionally, unlike equity-based models, it doesn't entail transferring ownership stakes in the company to investors.