What Is RBF & Why Should I Take Up Revenue Based Financing?

Since its adoption in India in 2020, more and more start-ups and small enterprises (SMEs) are pivoting towards this financing option. That’s because it allows businesses to obtain a sizable funding without liquidating their equity. 

Potential SAAS and D2C companies can opt for revenue-based financing solutions from KredX, a leading integrated cash flow solutions provider. 

But before discussing why RBF is a better capital choice for start-ups, let’s clear the air around it.

How Does Revenue-Based Financing Work?

Revenue-based financing is a means of obtaining credit by leveraging estimated earnings. Borrowers need to pledge a specific percent of their income, also known as revenue share, to the investor or lender. Thereafter, they need to repay the principal amount + revenue share to the lender.

For better understanding, take this example. Suppose company A’s monthly average earnings stand at Rs 30 lakh. Therefore, their projected earnings for the year is Rs 3.6 crore. It provides this estimate to an RBF provider and a proposition to obtain Rs 30 lakh against it. After an assessment, this lender extends the sum against a revenue share of 12%. Thus, company A must repay Rs.336000, i.e., Rs.3000000 + Rs.360000 (finance cost or revenue share). 

RBF companies look at several parameters like cash flow, revenues, operating margins, growth potential, and scalability, among others, as a part of their audit or due diligence. Once convinced, the lender will forward the agreed-upon amount to the borrower’s account. 

Why Should I Take Revenue Based Financing?

The revenue-based financing model is a pioneering asset class in India that took off during the pandemic as start-ups struggled drastically to raise funds. Revenue-based financing is a hybrid capital instrument that combines the best of both equity- and debt-based financing options. 

When opting for a revenue-based financing model, borrowers must remember a few things, including-

• RBF is a debt offered to start-ups and SMEs but is not as structured as a loan.
• In this, investors get a fixed share of the business’ revenues on a monthly basis. This signifies that if a company earns higher income a month, the investor simultaneously gets back a greater share. This repayment is inclusive of the principal and returns decided upon during the investment time.
• To access revenue-based financing, a company does not have to dilute equity to meet working capital requirements. 
• There is no need to pledge collateral as securities for revenue-based financing, making it a less risky proposition for borrowers. 
• For businesses that can carefully assess and predict their revenue flow, revenue-based financing is highly attractive. Though a start-up may not be absolutely profitable, they do have a regular stream of income. 
• With RBF, entrepreneurs can raise funds anywhere between Rs 5 lakh and Rs 15 crore. Borrowers will have to repay the debt with a profit share ranging between 2% and 15% instead of paying EMIs or equity dilution. 
• RBF usually comes with a repayment tenure of up to 12 months. Companies can repay the borrowed sum + revenue share within this period or earlier, depending on their revenue scale. 

Thus far, growth capital has been an exclusive concept in India because of the extensive cost and time required. Revenue-based financing mitigates these issues to provide fledgling businesses, especially SaaS-based and D2C, with a quicker and easier means to fund their investments. Companies can opt for a revenue-based financing solution from KredX, which offers to finance against nominal, 100% digitised documentation, and within just a few working days.