Revenue based-financing is about raising money from external investors based on the revenue already coming into a business. The terms of the finance revolve around three things: the total amount to be repaid over time; the share of revenue taken to repay the investment (typically between 1% and 8%) and how often it’ll be paid back (typically monthly).
The total a business has to pay back is normally a capped multiple of the investment, normally between 1.3x and 3x. So, say your business gets a $100,000 loan with a repayment cap of 1.3x at a 5% monthly repayment rate; you’ll be paying back 5% of your revenue every month until you’ve paid back $130,000.
Who is it for?
It’s big with companies that use a subscription model (particularly companies selling software as a service) but it is also handy for seasonal businesses, like hotels, where revenue can fluctuate. Increasingly, businesses in online sales and food and drink are opting for it, too.
If you’re growing at a moderate pace with recurring revenue but need an injection of cash for a growth initiative (like hiring, buying inventory or a big marketing campaign), it can be a good option.
Types of revenue-based financing
• Revenue-advance loan. The most common type is basically a loan that’s repaid using a percentage of future revenue until the loan is paid off in full.
• Recurring-revenue financing. Suitable for subscription-based businesses, the initial investment is based on a business selling monthly or quarterly receivables connected to their customers’ subscriptions. That means repayments are fixed.
• Monthly recurring revenue line of credit. Instead of a lump sum, you’re able to get a certain amount of money each month based on how much revenue you’ve made.
It's good because…
• It’s quick to get hold of cash – sometimes applications can be turned around in a couple of days.
• There’s less pay-back pressure as repayment is tied to your business’ performance. Plus, you don't pay interest on your outstanding balance.
• You don’t give up any equity or control, nor do you have to put up collateral or personal guarantees.
It's not so good because…
• The cost of getting the funding is often higher than other loan options – with some investors even basing their rates on the purpose you need it for.
What you need for it
• Annual revenue above $200,000.
• Consistent monthly revenue of at least $15,000 (and a track record of it).
• High growth margins.
• No other debt.
• A solid plan for what you’ll do with the cash.
• To be profitable (or on the path to profitability).
• In Europe, Uncapped lends to a range of different online businesses at a 6% flat fee.