What is Revenue-Based Funding?

Revenue-based funding (RBF) is an investment in a company where funds are provided in return for a percentage of future revenue. This kind of funding differs from traditional loans because it doesn't involve fixed repayments and doesn't require collateral.

Repayment is directly tied to the business's earnings. This financing model enables companies to expand their operations while reducing the pressure of fixed monthly payments. Since payments fluctuate with revenue, it is a sustainable alternative to traditional business funding, ensuring businesses only pay when they earn.

How Does Revenue-Based Funding Work?

Revenue-based funding offers companies funds that are repaid as a percentage of revenue generated until the total borrowed amount gets repaid. Since repayments are based on the earnings generated, the business does not have fixed payments, reducing financial strain.

Here is the process:

• A business applies for RBF; the lender reviews its revenue generation and financial stability.
• The business and the lender agree on a revenue percentage to be repaid.
• The agreed-upon capital is provided to the business.
• The agreed-upon revenue percentage gets deducted month after month automatically.
• The repayment goes on till the agreed-upon amount gets repaid.

Key Features of Revenue-Based Funding

Revenue-based funding is a financing method where businesses repay borrowed funds based on their revenue. The method brings greater flexibility in repayment schedules.

Key features:

• Variable amounts of payments based on revenue.
• No requirement for collateral, so businesses do not have to pledge assets.
• Faster approval process compared to most conventional loan providers.
• Suitable for companies with higher revenue potential that may have limited credit history.
• As the repayment of funds depends on business performance, the companies pay only when they generate revenues.

This type of funding is ideal for companies that have high revenue potential but unpredictable income sources.

Also Read: What is Business Turnover? Meaning, Definition, and Importance

Who Can Benefit from Revenue-Based Funding?

RBF is most helpful for revenue-generating businesses that may not be eligible for traditional funding due to uneven cash flow or limited credit history.

RBF is particularly used in industries such as:

• E-commerce sites that require funding for inventory and marketing.
• SaaS businesses that need investment for customer acquisition and scale-up.
• Service-oriented businesses that may have inconsistent income.
• Retail stores that seek further expansion.
• Growth technology startups with limited credit history but high growth potential.

Example Calculation of Revenue-Based Funding

Revenue-based funding permits businesses to repay the funding amount according to earnings, so it brings flexibility to financial management.

So, for example, if a company raises funds of Rs 1 Crore and agrees to repay 1.5x, the amount that needs to be repaid would be Rs 1.5 Crore. Here, the company decides to pay 10% of the monthly income, adjusting on the basis of variable revenues.

Here's an example of the scenario:

• First Revenue Month: 50,00,000 - Repayment: 5,00,000 (i.e. 10% of 50 Lakh)
• Second Revenue Month: 40,00,000 - Repayment: 4,00,000 (i.e. 10% of 40 Lakh)
• Third Revenue Month: 60,00,000 - Repayment: 6,00,000 (i.e. 10% of 60 Lakh)

So, the repayments continue until the total amount gets repaid.

Also Read: A Complete Guide to Small Business Financing

Potential Drawbacks of Revenue-Based Funding

While revenue-based funding is flexible, companies should consider probable challenges before choosing this financing method.

• Higher total repayment costs compared to traditional loans.
• Not ideal for those businesses that have inconsistent or low revenue.
• A percentage of revenue is automatically set for repayment, which can impact cash flow, especially during slower months.

How Are RBF and Traditional Financing Methods Different?

Revenue-based funding differs significantly from traditional Business Loans in eligibility criteria, repayment structure, and approval time.

We at Hero FinCorp provide Business Loans of up to Rs 40 Lakh with competitive interest rates and flexible repayment tenures of up to 60 months to businesses that require structured financing solutions to facilitate their growth.

Also Read: Guide to Understanding Working Capital Loans

Steps to Secure Revenue-Based Financing

Companies interested in RBF must evaluate their revenue model and ability to repay prior to applying.

Following is the stepwise process:

• Ensure the revenue model is reconcilable with revenue-based financing.
• Seek lenders who can offer revenue-based financing.
• Offer revenue statements, tax returns and other important financial documents.
• Ensure the repayment percentage and total amount of funding.
• The funds agreed upon are delivered to your business.
• A portion of revenue is deducted until the overall repayment is done.

Conclusion

Revenue-based financing is a flexible funding solution for companies, especially those with uneven revenues. Business owners should first assess their capability to manage repayments carefully and the total cost compared to conventional financing options.

Also Read: Crowdfunding: Meaning, Types, Sites and How It Works?

Frequently Asked Questions

1. What types of businesses can apply for revenue-based funding?

Businesses with steady revenue streams, such as e-commerce platforms, SaaS companies, and retail stores, can apply for revenue-based funding.

2. What are the eligibility criteria for revenue-based financing?

Most lenders require a minimum monthly revenue threshold and proof of a stable revenue model to approve financing.

3. Are there any risks associated with revenue-based funding?

Yes. Potential risks include higher total repayment costs and the impact on cash flow due to percentage-based repayments.

4. What are the eligibility criteria for revenue-based financing?

Businesses need consistent revenue, a scalable model, and a minimum turnover. Lenders assess revenue, growth potential, and repayment capacity.

Disclaimer: The information provided in this blog post is intended for informational purposes only. The content is based on research and opinions available at the time of writing. While we strive to ensure accuracy, we do not claim to be exhaustive or definitive. Readers are advised to independently verify any details mentioned here, such as specifications, features, and availability, before making any decisions. Hero FinCorp does not take responsibility for any discrepancies, inaccuracies, or changes that may occur after the publication of this blog.