Revenue Based Financing vs Venture Capital

Revenue-based financing or venture capital? Here's how each one works and when you should use it

Disadvantages of Venture Capital

- Dilution and loss of control of the company. Bringing venture capital into your company means sharing ownership of your project and, therefore, decision-making power over its progress.

- Risk of falling into an artificial growth rate. Early rounds of VC funding can help grow your startup's infrastructure, either for hiring or increasing the marketing budget. However, such accelerated steps can be detrimental if they are not matched with recurring business revenue. Scaling too early or spending resources on customer acquisition before finding the right market are two of the main reasons for business failure.

- It can be a distraction. Fundraising is not like going to the bank to borrow money. It is a time-consuming activity that can become a real distraction. In fact, it can easily become your main task and one of the biggest measures of your success to the detriment of what is important: your business.

Advantages of revenue-based financing

- No dilution. You get the capital you need for your startup in exchange for a percentage of your future revenues. Investors do not receive shares in the company, so there is no dilution or loss of control. This is one of the benefits of RBF.

- Faster and more agile. In less than 24 hours you have the answer to your request and you will know if you can count on the money you need for your marketing campaigns. So you can focus on your business and not on looking for funding or convincing investors.

- Flexible payments. Revenue based financing is better than a standard loan and more flexible because the monthly payments depend directly on the revenue of your start-up. If your business slows down due to seasonality, you will also pay less each month because repayments are a percentage of your sales. This is how the RBF adapts to the rhythm of your business.

- Incentive for networking. The faster your business grows, the faster the payback and the higher the IRR for us and our investors. This provides an incentive for all of us to share business contacts and connections to help you grow faster.

- You know the cost of the operation in advance. With this model you know the costs of the deal from the start. No surprises.

- Very clear access conditions. Revenue-based financing analyses your company's marketing and sales data to determine the extent to which your revenues are stable and predictable. Based on this analysis, it determines whether or not you will be able to meet your obligations. This makes the requirements for accessing the money much clearer and less random than with Venture Capital.

- No personal guarantees. At Ritmo we do not need any personal guarantees to close the operation. The company's numbers are the guarantee.

Disadvantages of Revenue Based Financing

You commit your future income. RBF capital is paid out as a monthly percentage of your income, which with RITMO is between 5% and 15%.
Less available capital. Compared to Venture capital, revenue based financing offers lower amounts and, in the case of RITMO, with a single destination: your online marketing campaigns. This can also be an advantage, as you will have to be more efficient in managing it.
It is not for everyone. To be able to apply for funding through the RBF model you need to have a stable and predictable income. The entire RBF model is based on that premise. That's why it's especially focused on startups that are part of the way through their initial journey. In RITMO, for example, you will need to demonstrate at least 12 months of activity and recurring revenue.
Less regulation, only if you don't choose well. Not all revenue-based finance providers are regulated in the same way. That is why it is important that you work with one that is, such as RITMO.

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