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

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.

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 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.

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.

Benefits of Revenue Based Financing

RBF offers several benefits for businesses seeking funding -

No dilution of equity

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.

Flexible repayment structure

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.

Fast and accessible funding

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.

Support for growth initiatives

RBF investors often provide additional value beyond capital. They may offer strategic advice, industry connections, and expertise to help businesses grow and succeed.

RBF vs. Traditional Financing

While revenue based financing offers unique advantages, it's important to understand how it compares to traditional financing methods -

Equity financing

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.

Debt financing

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.

Venture capital

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.

Conclusion

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.

FAQs on How to Buy Government Bonds:

Q. How is RBF different from equity-based financing?

A. Both equity and RBF investors are entitled to a share of a company’s profits. However, in the former case, companies need to relinquish a percentage of the company’s ownership to such investors. In the latter case, payment obligation ceases once the agreed-upon amount is repaid.

Q. Is RBF better than traditional debt instruments?

A. One of the reasons for RBFs growing popularity is that it’s simpler to access than other modes, such as venture debts, bank loans, or traditional venture capital.

Q. Who can apply for RBF?

A. In regard to eligibility, B2B software-as-a-service (SaaS) companies are at the top of the list. Besides early stage, e-commerce/D2C, food and beverage, and consumer software companies can also apply for the same.