Published Jul 21, 2021

What is Revenue-Based Financing? Here is Everything You Need to Know

Table of contents

Capital financing is a tedious, time-consuming and taxing process.

With the complexities of loan applications and trade-offs of equity financing, it is no surprise that more companies have turned to non-dilutive funding options, such as revenue-based financing.

With the global revenue-based financing market growing at an estimated CAGR of 61.8%(2020-2027), it is high time that executives got a good grasp of this financing method for better strategic planning and informed decision-making.

On that premise, this article walks you through the fundamentals of revenue-based financing, covering important concepts, examples and frequently asked questions:

  • What is revenue-based financing?
  • Why do you need revenue-based financing?
  • How does revenue-based financing work? (With example)
  • Is revenue-based financing a loan?
  • Revenue-based financing vs. debt and equity financing
  • Is revenue-based financing right for you?
  • How does Choco Up help companies grow their businesses with RBF funding?
  • Some last words

What is revenue-based financing?

Revenue-based financing (RBF) is an alternative financing model in which companies raise capital based on future revenue.

In revenue-based financing, RBF platforms put up funds for companies’ growth in exchange for a regular share or a certain percentage of the recipient companies’ revenue. This arrangement continues until a predetermined amount is repaid in full. Typically, this predetermined amount is the capital plus a flat fee.

Why do you need revenue-based financing?

If you are looking for growth capital and/or maintaining liquidity for your company, revenue-based financing is an option to consider. Below are some use cases of revenue-based financing:

  1. Your company is growing quickly, hence needing more cash for revenue-linked spending, such as ad spend and inventory;
  2. Your company has sufficient cash flow to meet working capital needs and is planning to expand. However, metrics are not favourable to raise capital from investors, and you do not want to dilute your equity;
  3. Your company receives a huge order but lacks the capital to complete fulfilment, or you want to maintain abundant capital for optimal liquidity; or
  4. Your company has raised a seed round of investment. It is reserved as a runway to meet your company’s working capital needs until the next round. Yet, you need extra capital for growth.

How does revenue-based financing work?

RBF platforms (like Choco Up) typically provide funding ranging from USD $10K to $10M. Companies can then use the capital to finance the expansion and growth of their businesses.

Contrary to conventional financing methods, repaying RBF funding is rather flexible. An example is given below.

Assume the RBF platform and recipient company have agreed on the following terms:

  • Funding: USD $150,000 (provided on day 1)
  • Flat fee: USD $12,000
  • Repayment: 9% of revenue on a monthly basis

The repayment schedule is as follows:

With a revenue-sharing arrangement, RBF platforms effectively offer protection against the downside risks of business investments.

If revenue performance is good (e.g. month 6 in the example), the repayment amount in that particular month would be higher, meaning that the funds will be repaid over a shorter timeline; but if revenue performance is mediocre (e.g. month 4), the repayment amount would be lower, spreading the repayment over a longer horizon.

Is revenue-based financing a loan?

No, it is not. In fact, revenue-based financing differs from a loan in many ways, namely, RBF platforms demand no interest on outstanding balance, repayments are not fixed but rather proportional to revenue, and recipient companies need not provide any collateral to the fund provider.

Learn more: Revenue-Based Loan Explained: Is It Really a Loan?

Revenue-based financing vs. debt and equity financing

Traditionally, debt and equity financing are two major ways to raise business capital. These two funding methods, however, come with significant drawbacks.

To begin, business loans are not easy to secure. Lengthy application forms, tons of paperwork and endless email correspondences… the sheer thought of these probably gives you a headache already. But the application does not end yet. Creditors would look at your company’s track record, credit history and other factors to determine whether a loan should be granted. The approval process could take months. Some lenders even require pledging of assets as collateral.

What about raising funds from venture capital firms or angel investors? With all the outreach efforts and investor pitches, equity financing could be equally burdensome as debt financing (if not more so). Besides, you will have to give up a portion of equity and/or control of your business.

The third option, revenue-based financing, combines the most favourable features of debt and equity financing while eliminating the major drawbacks of both.

Revenue-based financing vs. debt financing

RBF platforms adopt a revenue-sharing model, taking only a portion of your revenue to recover the amount funded, hence eliminating the pressure of having to pay fixed
monthly instalments.

Other advantages of revenue-based financing include:

  • Streamlined application process (for example, you simply need to fill out an online form at Choco Up to get a preliminary offer in 15 minutes)
  • Collateral is not a prerequisite to provision of funding
  • No restrictive covenants imposed

Our e-commerce lending guide covers the pros and cons of different debt financing options and why revenue-based financing is an alternative to e-commerce loans.

Revenue-based financing vs. equity financing

Dilution of equity could be a hefty price to pay for raising capital. By giving up partial ownership, you are also parting with a certain amount of decision-making power.

Learn more in our e-commerce funding guide (covering angel investors, venture capital and crowdfunding) to understand their respective pros and cons.

On the other hand, revenue-based financing is a non-dilutive funding solution as only a small percentage of your company’s revenue will be shared with RBF platforms. In other words, ownership of your business remains intact.

As a quick summary, below is a table that puts together the pros and cons of revenue-based, debt and equity financing:

Is revenue-based financing right for you?

Running a business inevitably involves the ebb and flow of finances. Revenue may shoot up in one month and drop in the next.

In times of uncertainty, it could be daunting to have fixed loan payments (plus interests) hovering over your head. The conventional approach to paying back loans may even inhibit growth.

Equity financing, on the other hand, may not be a desirable option given the need for shared ownership. If that is the case, revenue-based financing would be your best pick.

How does Choco Up help companies grow their businesses with RBF funding?

At Choco Up, we are dedicated to providing a flexible, non-dilutive funding solution which allows businesses to grow now, pay later.

As a revenue-based financing platform, we provide growth capital for fast-growing startups, small-and-medium businesses as well as e-commerce companies, enabling them to leverage the funds to grow and scale, then paying back through a small portion of their revenue.

Through revenue-based financing, Choco Up has helped companies in more than 10 markets and 10 sectors to scale their businesses without the need to dilute equity or borrow expensive loans with stringent terms.

If you are also looking for growth capital for your business, sign up to get a preliminary offer and let us help you grow.

Some last words

If pink is the new black in fashion, RBF is the new black in financing.

Despite being a relatively new financing model, revenue-based financing has picked up steam in recent years. It is a powerful financing option, allowing businesses to get the best of both worlds from debt and equity financing.

That being said, RBF may not be an apt financing model for all businesses. In particular, pre-revenue companies might not work well in an RBF model.

Nonetheless, where an arrangement of revenue-based financing is made, the interests of both involved parties are perfectly aligned – both benefit when the recipient company’s revenue grows, and both suffer when revenue falls.

If you are not sure whether revenue-based financing is suitable for your company or would love to find out more, leave us a message to learn more.

Interested in learning more about raising capital for your company? Check out the following guides we prepared for you:

• E-commerce Financing: Options to Finance Your Online Business
• Inventory Financing: Everything You Need To Know
• Merchant Cash Advance (MCA): Everything You Need To Know