Do you own a start-up, a digital business, or even if you’re an established business but need funds to grow your business but have a fear of taking business loans? Then the ideal solution for you would be to take revenue-based financing.
You must have seen your competitors or other small and medium enterprises opting for this method. They do not opt to look for angel investors or venture funds for investment.
But if you’re still wondering what it is or what the fuss is all about, then we are glad to say you’re at the right place. Today, we will explain what revenue-based financing is, working, the advantages, and its scope in India.
What is all the fuss about revenue-based financing?
To put this in simple terms, it is a financial aid model based on its revenues. The company will pledge to give a part of its annual revenues in return for the growth capital.
This strategy is opted by most small and medium enterprises because they get early access to the funds. They get this without putting up anything as collateral or equity dilution.
In this method, the investors investing in the company get a revenue share of the income. They get his amount until a pre-fixed amount has been paid. This amount is usually multiple of the principal amount invested and ranges between three to five times the original amount.
The amount agreed is equal to a percentage of Monthly Recurring Revenue (MRR). These repayments are agreed and the amount repaired is done between anywhere from one to six months.
This way, the investors are well-aware of the improvements in the company, and they also get paid quickly. A perfect example is municipal bonds. They are different from debt and equity-based funding.
Working of revenue-based financing
Companies can get revenue-based financing from several firms that are experts in dealing with this type of investment. The firms look at several aspects such as revenues, cash flow, operating margins, growth potential and scalability.
The firms then study the prospects, and once the firms have faith in the company, they will lend the amount at a mutually decided interest rate.
The lending method is similar to the angel inventors, but the only difference is how the company repays the funds. Once the company starts earning, it will share a part of the revenue with the lender.
In angel investing, they expect to be repaid irrespective of whether or not the company is performing well.
Advantages of revenue-based financing
Listed below are the advantages of revenue-based financing: –
- The business needs a very minimum rating to qualify. A business with a minimum FICO score of 550 is eligible for revenue-based financing. The absence of a minimum score system helps many small-scale companies succeed as they get funding easily.
- The company need not give any collateral to get the finance. Although the rates charged by the firms are higher than the conventional method of taking loans from banks, it is still worth it.
- The amount can be repaid in a very short amount of time. The minimum duration of repaying the amount is four months. The duration for repaying the amount can range anywhere between four months to eighteen months.
- Once the firm verifies the company, they can get the fund transferred to their account within seven to ten days. This is a quick and fast way to receive the funds.
Will revenue-based financing work in India?
In India, several firms specialise in revenue-based financing. You might have even heard a couple of names such as GetVantage, Velocity Finance and N+1 Capital, etc.
The amount given by these firms can be as low as Rs. 5 Lakhs up to a few crores, depending on the company’s size and the demands. Although it is a new concept for Indian markets, it has gained popularity among the US and European markets.
Real-world examples of revenue-based financing
A good example of a company making profits because of revenue-based financing is atterley.com. They asked for revenue-based financing for a major ad push. With the quick disposal of this method, they saw a 121% increase in their sales.
This increase was during the Q4 in 2020. Since they quickly got the funds, they had asked for, they could boost their sales, which flourished. This helped them pay back the amount in a flexible way compared to the conventional manner.
