As venture capital funding dries up due to COVID, many startups have found themselves looking for alternative financing opportunities that don’t involve raising equity. One option on the table is revenue-based financing (RBF), a type of revenue or profit-share investment structure that’s gained traction in the last several years.
Unlike equity financing, revenue-based financing is a fixed sum that’s repaid over time based on incoming revenue. Founders receive money from an investor to spend on marketing or inventory, and with every sale they make, they repay a percentage of that loan.
A company might receive €100k, and would then repay 5-20% of every future sale back to the investor until the amount is repaid in full — with a fixed fee on top. Typically there are no equities, personal guarantees or hidden fees involved.
Already a growing trend (particularly for e-commerce companies), the buzz around RBF is increasing. That’s in part because the instant cash structure allows founders to act on immediate growth opportunities instead of waiting around for equity capital that may or may not come through.
But even if RBF is potentially viable for startups, is it really ripe to take off? And who can take advantage of it?
The cofounders of Uncapped both stress that in COVID times and beyond, revenue-based financing is both a fast and fair option for startups who can benefit from funding repeatable parts of their business. If revenues slow, so do the repayments. The technology behind it also makes it possible for founders to get funding quickly, and without needing to step out for yet another pitch or meeting. It also assures that founders stay in control during times of uncertainty.
“Founders don’t need to risk their house, especially in a time when things are less certain. We’re really giving them an option to grow,” Ismail of Uncapped said.
But even if COVID weren’t in the picture, the tech landscape is finally ripe for something as data-driven as revenue-based finance.
“Five years ago, we wouldn’t have had all the platforms available from which we could take the necessary data for our product, at least from a technical perspective,” Pisarz said. “Behaviours have changed and more people are buying online. There’s now a bigger demand for focusing on funding repeatable parts of a business.”
Read the full article here: https://sifted.eu/articles/revenue-based-startup-financing/
