How Revenue-based Financing (RBF) Can Help Startups Post-COVID-19?

Roshni Khatri

25th May'23
How Revenue-based Financing (RBF) Can Help Startups Post-COVID-19? | OpenGrowth

Young businesses in India succeed using revenue-based financing (RBF), a common fundraising strategy in the US. With investors, businesses can now obtain capital in exchange for a share of their future gross income. This data-driven strategy has altered the conventional financing method, which provides several advantages for investors and businesses alike. 

The RBF funds provide funding to early-stage startups and SMEs (small and medium businesses) in industries including direct-to-customer (D2C), software-as-a-service (SaaS), and edtech. It allows businesses to raise financing by committing a portion of their future earnings.

RBF funds target tech-based companies and provide loan and equity investment. As new firms join the market with an RBF option to seek short-term funding, the model aligns accurately with the Indian entrepreneurial environment.


What is revenue-based financing for startups?

A capital-raising strategy called revenue-based financing, also known as royalty-based finance, involves creditors agreeing to lend money to a business in return for a set proportion of its ongoing total gross sales. It is an alternative investment strategy to more traditional equity-driven investments like debt and angel investment. 

Revenue-based finance is a desirable way for businesses to raise money. Without giving up some of its stock or putting up some of its assets as security, a business can raise the necessary financing. Additionally, revenue-based financing is significantly simpler and involves less paperwork than debt and equity financing.


What is the advantage of revenue-based financing?

There are several ways to finance an organization nowadays. You identify them as bank lenders, venture capitalists (VC), and angel investors. Besides this, you should also know how venture capital works. Revenue-based finance's main benefit is that it eliminates the drawbacks of other types of financing. Follow these points to know more:. 

  • No need for security

Businesses often need collateral. To guarantee a loan, you will need tangible assets like vehicles, machinery, or real estate. The pledged property will be auctioned by the creditor to make up for its loss if you do not repay the loan.

However, many modern companies use a digital-first, asset-light business strategy. This creates issues when lenders want assets as loan security. Revenue-based financing eliminates a significant borrowing barrier due to collateral requirements. Additionally, you may be guaranteed that the lender won't sell your assets if your company has difficulties making payments.



  • Rapid access to funding

Possibilities fly by like lightning bolts in today's world. Trends change quickly. So, corporate success is about agility. Due to budgetary limitations, you don't want to be the first to spot an opportunity but the last to take advantage of it. Revenue-based finance might provide immediate funding in this regard. 

RBF finance may be approved in days, unlike loans, which may take weeks or months to approve. For instance, it provides money in 48 hours. This is because while supporting firms, we take a data-driven strategy. Finance technology will connect with you, do its magic, and contact you with a great offer. 


  • Customizable payment terms 

Agility is like oxygen when it comes to company funding; you don't realize how significant it is until you need it. Loans have repayment obligations that must be met. You have set deadlines to remit specific sums of money. They limit the money you may spend on other aspects of your company. Through both positive and challenging times, the same weight is carried.

Consider how you would pay back a loan if you didn't have a lot of income during the lean months. The rigidity of your company's debt agreements might be fatal. While your income cycle is considered while repaying RBF money. RBF platforms divide a certain portion of your monthly income. Your monthly payment rises as your income rises and falls as your income declines. 

You have a lot of flexibility to pay back less during slow times. To ensure that you will never have to worry about making payments, and only return what you can afford. 


  • Less expensive than transferring equity

Even while you may receive $1 million in investment today, your investors' ownership stake will increase to $10 million over time. This will cost you $9 million in venture capital. Revenue-based funding would prevent this from happening. RBF platforms only charge you a flat fee for the money they provide you with, not ownership of your business. 

Capital costs are a fraction of your money, not a multiple of it. Additionally, the charge does not increase as your business grows. This will ensure that securing early-stage development finance does not become a sting in the tail and that you know the whole cost of capital upfront.


How does revenue-based financing work?

Before money trickles in, each firm must make an initial financial commitment. The majority of the funds are used for marketing, vendor payments, and inventory accumulation. This creates a sizable working capital shortfall for at least three to six months. Additionally, the more cash your brand needs to fund its growth, the quicker it will grow. In such circumstances, the cash flow gap will continue to grow even if you invest the majority of your generated revenue back into the company. Think about the possibility that a revenue-based financier may help you obtain a portion of your upcoming income now at a low cost. 

Now that you have the choice, you may use this money to grow your company. Not even this, as the rewards are based on a percentage of your sales; you pay more when you make more and less when you make less, and you can retain the extra earnings. Aside from the funding aspect, you also need to know the value of your business to determine the fair value of your business.



What is the future of revenue-based financing?

Since they concentrate on creating companies with tested business plans and minimal financial burn, I refer to them as "traditional." I'm talking about the tens of thousands of brand-new companies springing up in industries like Direct to Consumer (D2C), Software as a Service (SaaS), and Education. 

Although they were started by an emerging generation of entrepreneurs and are rapidly expanding companies with strong foundations, neither VC capital nor bank loans would be available to them. D2C is anticipated to grow into a $100 billion business, indicating that new-generation financiers will need significant capital. Here comes Revenue Based Financing (RBF), a business strategy that allows entrepreneurs to raise money by promising a portion of their future profits. A fixed-interest rate loan from a bank, NBFC, or family and friends with a pledge of collateral or a personal guarantee has been the traditional financing choice for small enterprises. Given that RBF serves all stakeholders, the moment is right for India expansion.


To conclude, we can say that from an investor's perspective, revenue-based financing offers a chance to generate large profits. However, because the payback rate is directly correlated with revenues, an investor should be aware of the risks involved in the financing arrangement. The payback rate will decrease accordingly if company sales noticeably decline. 

Additionally, not everyone can use a revenue-based financing strategy. Only businesses with sizable income streams can benefit from the approach. Thus a business that wants to use revenue-based financing needs high gross margins to guarantee it can pay back the investment. For instance, SaaS businesses benefit from revenue-driven funding. 


OpenGrowth is constantly looking for innovative and trending start-ups in the ecosystem. If you want more information about any module of OpenGrowth Hub, let us know in the comment section below.

A keen observer, who loves to spend time with nature. A fun loving person, enjoys to explore the new aspects of life. Passionate about reading and learning new things. Roshni is dedicated towards her work and has worked in different professions.