Revenue Based Finance explained

When it comes to raising finance for your business there are various different avenues you can go to with revenue based financing being one of the newer avenues which is increasing in popularity.

Traditional forms of financing are either debt or equity based but with modern business this may not be the most suitable for your business and of course, if you can keep hold of equity in your business it's always a good thing.

The number of companies who now offer or are solely focused on offering revenue based lending has increased massively in the last few years and we'll look at the positives and negatives of this type of funding, who offer it, and if it's suitable for your business.

What is Revenue Based Financing?

In simple terms, Revenue based financing (RBF) gives businesses the ability to raise money in return for a percentage of their future revenue. Essentially you're using this funding to access future revenue right now, of course, there is a cost to doing this and this is where revenue based lenders make their money.

The capital that you borrow from these companies is repaid based on a certain percentage of your business's revenue each month.

How do lenders assess how much I can borrow?

How much your company can borrow will depend on a number of factors, the lender will look at your company's financial history and use their own calculations to work out how much they can lend you and over how many months.

In general, you'll find that you can borrow up to 3-8 x your monthly recurring revenue or around 30% of your company's annual recurring revenue (ARR).

Which Revenue Based Finance company to choose?

Choosing the right finance company to fund your business is an important decision, it's worth considering various factors when choosing one to go with including:

Location - Check that the lender you wish to go with accepts companies based in the country you are located in, most companies who offer this type of lending will offer it to business located across the UK, Europe and the United States.

Rates and fees - These will vary from lender to lender, but typically are all quite similar

Uncapped - Revenue based financing company

Uncapped was founded in 2019 and has seen funded over 500+ companies, they specialize in revenue based financing and have funded companies across the world, they are online based running from the website WeAreUncapped.com and offer funding to founders of all types. Our detailed Uncapped review will give you more specific insights into the company and what it is has to offer.

Things we like about Uncapped:

• Fast decisions - Get a decision within 24 hours
• Funding from £50k to £10 million ($50k to $10m)
• No-interest and No-equity flexible loans
• Various funding options including Fixed term loans, SaaS runway, Inventory financing and Revenue based loans
• No personal guarantees or equity loss
• Know the full cost upfront

Who they fund

• Businesses with online models
• 6+ months in business (with track record of sales/growth)
• £50k+/$50k+ monthly revenue

Uncapped currently offers lending to companies based in the 18+ countries including:

• United Kingdom,
• United States
• Belgium
• Croatia
• Denmark
• Estonia
• Germany
• Netherlands
• Poland
• Slovenia
• Spain
• Sweden
• Switzerland
• and more

Head over to the Uncapped* website to check if you're eligible or find out more

How does Revenue Based Finance work?

In most cases, the process is much simpler than other methods and the steps you take are generally along these lines:

1. Sign up to a revenue-based financing lender such as Uncapped
2. Securely share your business financial accounts, this is often done by connecting software such as Stripe, Xero, Quickbooks etc
3. The Revenue Based Finance company will make you lending offers, you can select one that is suitable for you
4. You then will get the capital and you'll make repayments based on the revenue percentage you've agreed to or flat fee.

How much does revenue based financing cost?

In general, companies who offer this type of revenue based financing offer two types of agreement:

Variable collection - This is the most common and involves repaying the capital based on a percentage of your gross profit. Typically these repayment rates will be somewhere between 5-15% of your revenue.

Flat fee - This type of agreement means you'll pay a fixed percentage of your future revenue every month for a set number of months often up to several years. This method typically sees rates of between 1-3%.

You can get an idea of how much it will cost using a revenue based financing calculator like the one below on the Uncapped website

The positives of revenue based financing

No equity dilution - One of the best things about using this type of financing is that you give zero equity away, meaning your company share structure and ownership will remain the same.

A fast method of funding - It is much quicker than other forms of financing, unlike other funding options where you can be weighed down with paperwork, questions and red tape, this type of financing is often much faster with little paperwork, you can often get decisions within the day on how much you can borrow.

Flexible finance - With most agreements based on repaying a percentage of future revenue it means you pay less on quieter months and more on busier months.

Often cheaper - The repayment percentages are often lower than interest rates of capital that you may get from an investor

No personal guarantees are required - This gives founders and owners less risk if the worst happens and your company can no longer repay the capital.

Great for companies with MRR or ARR - It's a great option for any company with monthly recurring revenue (MRR) or annual recurring revenue (ARR) as this gives the lender a better ability to forecast future revenues as well as reduce the risks of their capital.

The downsides to revenue based financing

Not suitable for all companies - One of the downsides of this type of funding it won't be right for all types of companies, if your revenue fluctuates or if you have few recurring payments then it can sometimes be harder to get funding like this.

Smaller capital - Your loan amount will be based on your revenue, therefore if you require large loans that are out of line with your current revenue i.e for growth/investment purposes then other methods may be more suitable.

Fees and interest rates can be high - When compared to traditional forms of funding sometimes the rates may be higher there is more risk for the lender when there are fewer guarantees.

Cashflow impact - Your cashflow will be affected by the repayments based on the revenue you bring in, as with any business your revenue can vary and if revenue forecasts turn out to be incorrect then the lender may require more payments or amendments to the agreement.

Who is Revenue based finance suited to?

This form of financing is particularly suited to SaaS (software as a service) companies, or those with recurring payments but is also great for companies with a steady income as long as they have a track record/historical records of this income too.

Typically the most popular type of businesses that use this form of revenue based funding are:

• SaaS companies (Software As A Service)
• Subscription-based businesses
• E-commerce companies
• Businesses with steady income
• Companies that struggle to get other forms of finance

One of the most common reasons that businesses decide to use revenue based financing is when the company is growing due to running profitable ad campaigns and you simply want to raise finance to put more capital into these adverts knowing you'll be profitable and be able to pay the loan back.

SaaS companies

Software as a service businesses have boomed over more recent years, gone are the days where you pay a one-off fee for a piece of software and get a lifetime use of it, the majority of companies now charge a monthly or annual subscription for software.

These companies are well suited to revenue based financing as the recurring payments from customers reduce the risks to the lenders, they will take into account metrics such as the lifetime value of the customer, churn rate, average subscription length and so on to be able to offer you capital for a set time.

Seasonal businesses

For founders and businesses that run a company that has seasonal sales, for example, a gifting company where 85% of revenue comes in November and December, Revenue based financing can be a great option as you can get capital in order to fund stock purchases and marketing spend in the run-up to your busy period.

E-commerce businesses

For businesses that run online shops, this type of funding is suited as lenders can quickly see a breakdown of all of your online financials and more easily predict future revenues and cashflow.

This means you'll likely get a competitive finance offer and it'll be extremely quick in comparison to going to a bank for a business loan for example.

Alternatives to Revenue based finance

With any financial decision, you'll need to weigh up what is best for your business, therefore it is always worth looking into the alternatives to revenue-based financing and see if they may offer a more cost-effective or suitable funding option.

Equity financing

Going down the equity financing route to raise finance means you'll have to give away part of your company, and your ownership will be diluted which isn't necessarily a bad thing if it allows your company to grow significantly but if there are other options available that can give you the same growth but without giving away equity then these may be more favorable.

The route of equity financing may be suitable for some who are wanting to raise larger amounts of capital and who are prepared for dilution in order to achieve this.

For example, if you're looking to raise thousands to invest in new technology that is proprietary with the idea of selling the business based on this rather than revenue then you may find that equity finance is a better choice instead of this type of funding which focuses on revenue.

Debt financing

The more traditional debt financing method of debt funding is quite similar to revenue based financing in terms of you'll be getting a loan that you require to pay back, however, you will have fixed payments that don't vary depending on revenue.

This means if you have a slow month you'll still need to repay the same amount as a busy month, this can put a strain on your cashflow and your company finances as a whole. Revenue based funding repayments would vary depending on the monthly revenue.

You'll also often need to attach a personal guarantee to these loans, meaning you'll be liable to repay the loan personally if your business cannot.

This type of method along with equity financing can take longer to get the actual cash in your business bank account in comparison to revenue based financing.

Revenue based financing for startups

For startups looking for revenue based financing you'll need to bear in mind that typically most firms that offer this type of lending will require a certain number of months of trading and sales.

This is generally around 6 months+ and you'll find that the more months and history of sales you have, generally the more capital you will be able to borrow and the better the rates.

Is revenue based financing right for my business?

Ultimately the only person who will know the answer to this will be you, you'll need to weigh up the pros and cons of this type of funding as well as see if your business fits in with the type of businesses that are typically funded this way.

Revenue based financing options can be extremely useful for certain companies as a business lending option but just because a revenue based loan option is available may not mean that this is right for you.

There are companies out there that look at your business and give you an overview of the options available, you can check out of Swoopfunding review to see one such business that targets UK companies.

It is always worth thoroughly researching all of the available  methods of raising capital to find the best business finance model for your business.

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