Pros and Cons of Revenue-Based Financing (RBF)
Whether you’re putting in your own capital, seeking out loans, or finding other methods to access funds, most companies need money in order to grow. If you’re buying inventory, hiring staff, developing products, or bringing them to market, you probably require some kind of investment to succeed. There are all kinds of companies willing to invest in startups — but which one is right for you?
The New Landscape of Technology
More than ever before, startups need access to capital that is quick, reliable, and doesn’t require jumping through too many hoops. Companies have been moving more quickly through the product development and revenue generation phases in recent years, and financing options have arisen to keep up with demand.
Revenue based financing (RBF) is one of these options. In the RBF funding model, companies trade an agreed upon portion of future sales (usually between 1-10%) in order to get access to funds up front. The company will then make monthly payments on the basis of revenue earned during the period. They will continue making these payments for an agreed upon term (at Corl, we use 2 years), before paying back the lump sum funds in a balloon payment at the end of the loan.
Pros and Cons of RBF
- Speed: Because loans are underwritten based on company type and revenue potential rather than credit history or personal guarantees, RBF lenders can provide funds in a much faster time frame than traditional banks.
- Dilution: In the initial stages of business, many founders want to hold the reins. With RBF, startups aren’t required to give up a piece of their company. So while this doesn’t mean VC, angel investors, or other forms of equity are off the table, using RBF to meet funding needs can give you time to strategize and perform right now.
- Survival: unlike banks and traditional forms of lending, RBF loans do not require payment during months you don’t make money. In an uncertain economy and with the natural ups and downs of any business, this can give you enough wiggle room to stay competitive during a tough time.
- Support: although RBF doesn’t mean you have to let go of the reins or give up an ownership interest in your company, lenders are providing you with a loan based on the assumption that your business will do well. In this ‘win win’ scenario, you and your RBF lender are on the same side, with both parties hoping you succeed.
- Growth: since RBF doesn’t take equity or saddle you with debt, it can be used in between funding rounds to make your organization more appealing to investors. An RBF-backed loan can pay for a key marketing hire, a new development phase, or a product rollout that will increase the value of your company for the next round.
- Fit: revenue based financing is a great option for many companies, but not all of them are the right fit. For RBF lenders to agree to a loan, your company needs to show that it can make money (even if it isn’t doing so right now). Companies that aren’t quite in the right stage of growth, or will take a long time to become profitable, often don’t qualify for a loan.
- Funds: unlike loans from VCs or angel investors, RBF loans require a monthly payment as long as you’re bringing in funds. While for many founders this is a good alternative to giving up a piece of the company, it does require sacrificing some of your cash flow.
Running a startup takes time, passion, and the right investment. Although the market is unpredictable at times, newer options for financing like RBF can take a lot of the stress out of getting funding. Happy growing!