SME Financing: What is Revenue-Based-Financing?

Born in the United States in the 1990s and arriving in Europe in 2019, revenue-based Financing is still little known in France, where it is still little used. As its name suggests, it is short-term Financing based on revenues, which allows companies that desire to obtain funds very quickly. Economical, non-dilutive and efficient for young structures in search of reactivity, this method of Financing offers companies an advance on cash flow when investors receive a percentage of the turnover. Find out everything there is to know about RBF in this article!

RBF: definition of revenue-based Financing

Growing businesses often need to raise money quickly and rely on external finance to invest and grow. Revenue-based Financing allows them to borrow this money from other companies and pay it back later, based on the turnover they generate.

While traditional Financing involves time and sometimes costly procedures, RBF requires only an eligibility test, which allows funds to be released in only one or two days. Regardless of the loan amount, the entrepreneur retains complete control of their capital, is not accountable to demanding shareholders, and does not incur debt: payments are deducted from future profits. RBF is, therefore, particularly attractive for digital marketplaces and SaaS companies that often need the flexibility to launch marketing campaigns and boost their turnover.

Revenue-Based Financing: how does it work?

From the RBF platform, the company wishing to obtain a loan fills in information (accounts, advertising accounts, sales results, etc.) to verify its eligibility. Algorithms then evaluate the project’s growth potential, scalability, and performance. If its accuracy is proven, the funder sends funds within 24 to 48 hours for a commission (6 to 9% of the amount borrowed). It will be necessary to start repaying them only after several months. The monthly instalments will then be based on the company’s actual performance, not on a fixed amount, so as not to hinder the growth of the structure and to offer it more flexibility.

RBF is enabled by a small revolution in the mainstream financial system that dates back to 2018: Open Banking. This set of regulations improves the sector’s transparency by allowing financial service providers to access company data securely using open technologies. This facilitated access to data has made it possible to develop the eligibility tests to which companies applying for income-based Financing are subject. However, these companies must have existed for a minimum period (about one year) before they can use RBF.

RBF: Why does it work?

Revenue-Based Financing is an alternative to traditional financing methods. The disadvantage of conventional bank loans is that they have fixed monthly payments. Raising funds needed for investment can be time-consuming for start-ups and must be approved by the public or banking institutions. Bank credit is not without risks and remains inflexible, as the process is costly and time-consuming and can sometimes lead to over-indebtedness.

RBF is much less burdensome than the traditional banking system in terms of administration. There is no need to prove the soundness of your business plan to a banker or to file complicated applications. All you have to do is upload the necessary documents to a platform. There is no need to wait for weeks or pay for a review of the file: fundraising is done in a few dozen hours and can be adapted to all stages of a company’s growth, whether a first or tenth investment.

This is a real asset when launching marketing actions to make your company known without having to dip into cash flow or reinvest to hire more staff. The RBF removes the obstacles traditionally encountered by companies during their financing phase: it does not require diluting its capital or providing restrictive guarantees. The indexation of monthly payments to turnover can also be a source of motivation: a successful company will repay its loan more quickly.

RBF: The benefits of Revenue-Based Financing

• Fast Financing. RBF allows companies to obtain professional financing while reducing the administrative burden, the time needed to process applications, and the risk of having to repay a fixed amount of money without having any visibility on the development of the business. Funding is allocated based on data submitted by the company online, bypassing the traditional financial system and avoiding intermediaries, fees and waiting.
• No capital dilution. Start-ups are often looking for funds to launch and increase their visibility. But RBF is also suitable for companies with recurring revenue, either annually (ARR) or monthly (MRR). It allows them to obtain Financing based on this revenue without diluting their capital with other investors or investment funds. Several FinTechs have already specialised in collecting data from companies to conduct eligibility tests and facilitate obtaining funding for all companies, with or without recurring income.
• Greater freedom of movement. Where traditional fundraising from individuals, banks, or the state generates debt, the RBF is only repaid on future sales and gives the entrepreneur total control over their capital. They can invest without being subject to shareholder pressure.

For all these reasons, the number of RBF platforms will likely continue to grow. But for these platforms to work, the payment flows need to be secure and optimised to reassure everyone involved in the transaction that it is safe, and to encourage them to go through with it.

To this end, the payment solution specialising in financial marketplaces, Lemonway, offers support to platform operators in securing their payment flows. With Lemonway as your PSP, you can manage transactions between investors and companies simply and in full compliance. Want to know more? Contact us for more information!