A solution to dilution: Revenue-based financing
Revenue-based financing ("RBF") is a loan in which repayments are based on a percentage of the borrower's monthly revenue rather than a fixed amount.
Revenue-based financing
What is revenue-based financing?
Revenue-based financing ("RBF") is a loan in which repayments are based on a percentage of the borrower's monthly revenue rather than a fixed amount. The payments fluctuate with the borrower's financial performance, going up when revenue is strong and down when it is lower.
What it isn’t?
How does it compare to an MRR line of credit?
RBF is often confused with MRR-based loans. RBF is a loan in which repayment is based on monthly revenue. MRR-based loans are lines of credit in which the amount available for borrowing is based on monthly revenue.
How is it different than traditional debt?
Banks are subject to significant regulatory constraints. Therefore, revenue-based financing firms can often provide larger loan amounts and require fewer restrictive covenants than banks. The trade-off is that revenue loans are more expensive than traditional debt.
How does it compare to venture capital or other types of equity investment?
Revenue-based funding is non-dilutive or minimally dilutive so entrepreneurs or management can keep a much larger percentage of ownership. In addition, lenders do not require board seats or other direct involvement in the governance or operations of the company.
How does revenue-based financing work?
RBFs can be structured in many different ways. The most common structure is a term loan. Typically, the full amount is not advanced up front. The drawdown can occur over multiple years so that interest expense is not incurred until the funds are needed. Payments (which include principal and interest) are based on a fixed percentage of revenue or cash receipts from the prior month or quarter.
The structure is flexible; generally, payments are made until one of the following milestones occurs:
The lender receives a pre-determined multiple of the original loan;
The lender achieves a pre-determined internal rate of return (IRR); or
A terminal date is reached.
After the milestone is reached, the loan obligation is retired and no further payments are due.
What are the benefits?
RBF is non-dilutive
Generally no board seats
A personal guarantee is generally not required.
No valuation is required
Collateral is generally not required.
Minimal restrictive covenants.
Due diligence process is simpler and faster than an equity fundraising.
What are the drawbacks?
Must be generating revenue.
Strong gross margins since a significant percentage will be used for loan repayments.
There is no stated interest rate so estimating cost can be difficult
If you’ve enjoyed this post and interested in ways to access non-dilutive capital:
