As the start-up ecosystem in India strengthens, many new classes of capitals are being introduced. And of all the capital classes, both investors and entrepreneurs find revenue-based financing a distinct solution.
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.
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 a 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.
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-
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.
RBF offers several benefits for businesses seeking funding -
Unlike traditional financing methods, RBF does not require business owners to give up ownership stakes in their company. This means that entrepreneurs can secure capital without relinquishing control or sacrificing future potential.
RBF payments are directly tied to a business's revenue. During slow periods, the payments adjust accordingly, alleviating the pressure of fixed monthly payments that can strain cash flow. This flexibility allows businesses to manage their finances more effectively.
Revenue based financing can be obtained relatively quickly compared to traditional loans, which often involve lengthy application processes. This speed can be crucial for businesses in need of immediate capital to seize growth opportunities or overcome financial challenges.
RBF investors often provide additional value beyond capital. They may offer strategic advice, industry connections, and expertise to help businesses grow and succeed.
While revenue based financing offers unique advantages, it's important to understand how it compares to traditional financing methods -
RBF allows businesses to raise capital without giving up ownership. In contrast, equity financing involves selling shares of the company, which dilutes the founder's ownership stake.
Unlike traditional loans, RBF does not require fixed monthly payments or collateral. Instead, repayments are directly tied to revenue, providing more flexibility during lean periods.
RBF is an alternative to venture capital funding, offering a less risky and more accessible option for businesses that don't fit the typical venture capital profile.
Revenue Based Financing (RBF) provides an attractive alternative to traditional financing methods for businesses seeking capital without diluting equity. Its flexible repayment structure, quick accessibility, and potential for strategic support make it an appealing option for startups, early-stage businesses, and companies with specific growth initiatives. However, it's essential to evaluate the terms, consider the implications, and weigh the risks before opting for RBF. By understanding the nuances of revenue based financing, you can make an informed decision that aligns with your business's goals and financial capabilities.