Revenue-based finance (RBF) is a method for businesses to raise capital by offering a percentage of future ongoing revenues in exchange for funds invested. It is a type of financial capital provided to small or growing businesses in which investors inject capital into a business in exchange for a fixed percentage of ongoing gross revenues, with payment increases and decreases based on business revenues, which are typically measured as daily or monthly revenue. It is a means of generating cash for a company from investors who receive a proportion of the company’s ongoing gross revenues in exchange for their investment.
Revenue-based financing is typically distinguished from both debt and equity-based financing. Typically, the investor’s returns will continue until the initial capital amount plus a multiple (sometimes known as a cap) is repaid. A predetermined percentage of income will be paid to investors until a specific multiple of the original investment has been returned. RBF investors often expect the loan to be returned within 3 to 5 years following the initial investment. Investors in an RBF investment receive a regular share of the business’s income until a predetermined amount is paid.
RBF is frequently defined as a bridge between a bank loan, which typically requires collateral or major assets, and angel investment or venture capital, which entails selling a portion of the company’s stock in exchange for the investment. This predetermined sum is often a multiple of the initial investment and ranges between three and five times the original amount deposited. In an RBF investment, investors typically do not accept an upfront ownership stake (equity) in the business, instead opting for a minor equity warrant. RBF investments often do not necessitate a position on the company’s board of directors, nor do they necessitate a valuation exercise. RBF also does not require the loan to be backed by the founder’s personal assets.
Revenue-based financing differs from equity financing in that the investor has no direct ownership of the company. As a result, revenue-based financing is frequently regarded as a combination of debt and equity financing. It is most commonly employed by small to medium-sized firms that would otherwise be unable to get more traditional types of funding. Because the sources of revenue-based financing become a business partner, the transaction costs can be significantly higher than those of a traditional loan.
It is a different investment model than more traditional equity-based investments like venture capital and angel investing, as well as debt financing. While revenue-based financing has been utilized to raise funding for SaaS products all around the world by players such as Novel Growth Partners, Big Foot Capital, Earnest Capital, and Lighter Capital, it is now being used for D2C firms. ClearCo and Valerian Funds are leading the way in RBF for consumer brands in the West, while emerging businesses like Klub are doing the same in the East.