{"id":7539,"date":"2021-11-03T12:51:30","date_gmt":"2021-11-03T12:51:30","guid":{"rendered":"https:\/\/kredx.com\/blog\/?p=7539"},"modified":"2023-10-26T05:50:50","modified_gmt":"2023-10-26T05:50:50","slug":"is-revenue-based-financing-the-best-fit-for-your-business","status":"publish","type":"post","link":"https:\/\/www.kredx.com\/blog\/is-revenue-based-financing-the-best-fit-for-your-business\/","title":{"rendered":"Is Revenue Based Financing The Best Fit For Your Business?"},"content":{"rendered":"\t\t
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Revenue based financing<\/b> has emerged as a popular alternative financing option for start-ups and small businesses. The global market for revenue-based finance is growing at a CAGR (compound annual growth rate) of 6.18% between 2020 and 2027. Valued at $901.41 million in 2019, its market size is projected to reach $42 billion by 2027.\u00a0<\/span><\/p>

Revenue based financing provides small businesses with an easy and quick way to raise funds. Companies can also use the MANDII app to get funds online in just 30 minutes. MSME Atma Nirbhar and Development Initiative of India (MANDII) is a marketplace platform made by companies like KredX<\/a> to provide collateral-free financing for MSME and start-ups.\u00a0<\/span><\/p>

A Brief Overview Of Revenue Based Financing<\/b><\/h2>

Revenue-based financing<\/b> (RBF) is a type of capital raising process where investors agree to provide funds in exchange for a certain percentage of a company’s gross profits. The company raising funds via RBF needs to make periodic payments to these investors until a predetermined sum is compensated.\u00a0<\/span><\/p>

Sometimes called royalty-based financing, RBF allows founders to raise funds without diluting their equity holdings or placing assets as collateral. Moreover, it provides them with an easy and quick method of raising funds to maintain cash flow requirements and make expansions.\u00a0<\/span><\/p>

Unlike most debt financing options where one has to make regular repayments, repayments in RBF happen as a percentage of monthly revenue. This ensures that a company has sufficient capital to deal with its short-term needs.\u00a0<\/span><\/p>

Unlike equity-based investment methods, RBF does not require owners to transfer their stake. They also do not have to provide investors seats on the board of directors. This allows them to keep full ownership of their company and be free to make independent decisions.<\/span><\/p>

How Does Revenue Based Financing Work?<\/b><\/h2>

Suppose the CEO of a company (say ABC) requires around Rs. 1 crore of funds for an expansion. If ABC already has pending debts, it will not be able to acquire these funds from banks. Moreover, if the shareholders of ABC do not agree to dilute their stakes, the company will not be able to get equity-based financing. That is when ABC will turn to a financial institution (say XYZ) for <\/span>revenue-based financing<\/b><\/a>.<\/span><\/p>

XYZ will check past revenue statements and do a thorough credit analysis to project ABC\u2019s future earnings and decide the terms based on this data. Let us say they make an offer to lend Rs. 1 crore funds upfront, with a 20% revenue share and total fees of 10%.\u00a0<\/span><\/p>

This means that ABC will have to repay 20% of its revenue (monthly\/quarterly) till it repays a total of (Rs. 1 crore + 10% of Rs. 1 crore) Rs. 1,10,000.\u00a0<\/span><\/p>

Benefits of Revenue Based Financing<\/b><\/h2>

The following are some of the main advantages of revenue-based financing:<\/span><\/p>