Trend Alert: Revenue-Based Financing
28 July 2022
A new type of startup financing is on the rise: revenue-based financing. Here we explain what it's all about and where you can find investors for sales-based funding.
Especially in times of crisis, capital providers may act more cautiously, or "conservatively". This means that it becomes more difficult to attract investors. Revenue-based financing is a popular trend in a growing list of ways to fund your business without issuing company shares.
If your company is growing rapidly, you face the challenge of having to invest quickly. Capital resources can become scarce in the short term. Bootstrapping, in which startups finance themselves sustainably from current revenues, can also slow down scaling.
Revenue-based financing can be a solution. Here, your business is quickly financed on the basis that investors receive a share of your future revenues. You don't have to give up any stake in your business.
Your business receives upfront cash or an incremental equity payment that is repaid at a percentage of your monthly revenue. This means that the amount of repayment is based on the monthly performance of your business.
Platforms For Revenue-Based Financing
E-commerce startups can apply to Shopify Capital, for example, for financing in exchange for shares in future sales. The process of this financing solution should be as simple, unbureaucratic and seamless as possible. This is not a surprise, because if your e-commerce business uses Shopify as its store platform, Shopify has a full overview of your sales figures.
Wayflyer funds e-commerce businesses and also harnesses their marketing team to help funded startups scale.
Clear.co also specializes in funding e-commerce startups, and again, the repayment of funding is just like that of a loan, only lower risk, as repayment is based on the amount of your sales. If your sales decrease, the amount of your repayments will also decrease.
SaaS startups are equally particularly popular with revenue-based funders due to their predictable revenue and profit margins, which allow for revenue sharing on a percentage basis. Here, for example, Lighter Capital arranges funding of up to $3M.
Round2 Capital Partners specializes in revenue-based financing for European software and technology companies.
Creators who start their own business with a podcast can secure an investment through Podfund for 7% to 15% of future revenue.
Wellness startups can apply to the Calm Company Fund. Again, funding is on a shared earnings agreement.
Revenue-Based Financing: Pros And Cons
Each financing option has advantages and also disadvantages. With revenue-based financing, speed is a major advantage. On the other hand, the percentage shareholdings in the shared earnings agreements are comparatively high.
The cost of revenue-based financing is usually higher than taking out a bank loan, but at lower risk. RBF is generally less expensive than VC financing because it does not involve the high price of issuing equity stakes in the company.
Investors who lean toward RBF as a lender are looking to finance repeatable processes such as paid marketing, payroll, and operations. For R&D financing, you have higher odds with equity financing - in part because there is usually significant market risk here.
Please note that we want to introduce you to the Revenue-Based Financing trend. We are not a financial broker. At Numarics, we operate independently of financiers. However, our team of business consultants is always ready to provide you with general business advice. Simply download the Numarics app and book an appointment - free of charge for Numarics users.
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