What is Revenue-Based Financing: alternative financing for eCommerce

Revenue-Based Finance provides digital companies with a faster and more flexible type of financing. Discover its advantages and features.

What is Revenue-Based Financing (RBF)

Revenue-Based Financing (RBF) is an alternative financing strategy, generally geared for eCommerce businesses, that relies on the revenue stream of the business to determine the terms and conditions of the financing. That is, unlike traditional financing, which relies on a company's credit history and assets to determine its creditworthiness, RBF focuses on the business's ability to generate revenue and cash flow.

Thus, rather than offering a fixed loan, investors provide capital in exchange for a percentage of the business's future revenue stream. The terms of the agreement may vary, but generally a percentage of revenue is agreed to be shared with the investor over a specified period of time.

The payment is made through a percentage of the monthly sales of the business, which means that the amount of the payment varies depending on how the business does in any given month.

How Revenue-Based Financing works

The way RBF works is very simple. In essence, a company obtains liquidity to finance its marketing campaigns, with the condition that the loan is subsequently repaid based on the company's revenue-generating capacity, together with the interest or fees agreed in the contract.

This form of financing allows companies to match the loan repayment to their revenues. That is, more is paid when the company's revenues are higher and less when there is a valley in revenue generation, which gives some flexibility for less liquid months.

For example, suppose an eCommerce company receives a capital of €50,000 in exchange for 10% of its monthly revenues for a period of 24 months. If the company generates €100,000 in revenue in a given month, it must pay the investor €10,000 that month. If the company generates €150,000 in revenue the following month, it must pay the investor €15,000. But if the following month, revenues drop to €20,000, the company would only have to pay €2,000.

The loan would be fully amortized at the moment when all the capital has been repaid together with the interest agreed in the contract.

What are the advantages of Revenue-Based Finance

Revenue-Based Financing is a modality that has been gaining popularity in recent years thanks to all its advantages. Some of them are the following:

There is no dilution. Your company raises the capital without the investors receiving any shares or participation in return. Consequently, there is neither dilution nor loss of control of the company's capital. You only have to repay the loan according to the earning capacity of your company. This is one of the most relevant benefits of RBF.
It is very agile and fast. RBF is a form of financing that takes advantage of all the potential of the Internet, so it is very agile and fast. In less than 24 hours, you will know if you can count on the money you need to finance your marketing campaigns. With RITMO, we pre-approve the advance so that you have it in less than 24 hours from the time you fill out your application.
Payments are flexible and tailored to your earning capacity. Unlike traditional financing, where payments are fixed and do not take into account the reality of the business, RBF is a flexible form of financing that adapts to your revenue generation. If the company has a low season, the payments will also be lower.
Low risk. RBF shares the business risk between the investor and the entrepreneur. If the business does not generate revenue, the investor will not get a return. This means that the company is not assuming the full risk of the investment.
No personal guarantees. Unlike traditional loans, Revenue-Based Finance does not require collateral such as real estate or equipment. Instead, investors rely on the company's ability to generate future revenue with which to guarantee repayment of the loan.
A very clear and transparent form of financing. The way in which the RBF determines the terms of the financing depends on each company. Investors analyze your company's marketing and sales data to see if your revenues will be stable and predictable. Based on this analysis, they determine whether or not you will be able to meet your obligations. Therefore, the conditions for accessing the money are much clearer and less random than with Venture Capital. If you want to learn more about the main differences between Revenue-Based Finance and Venture Capital, we recommend you to click here.
An incentive for the startup's growth. Both investors and the company itself are interested in promoting the rapid growth of the business. Therefore, investors do not simply leave their money, but will look for ways to incentivize the growth of the company, either by encouraging networking or with new business connections.
Credit history no longer matters so much. Credit history no longer matters so much. The RBF provides access to a second chance for many companies that are having trouble accessing traditional financing. If investors anticipate future growth, their past doesn't matter as much, even if there is a history of credit problems.

RBF vs. Traditional Finance

Traditional financing and Revenue Based Finance (RBF) are two different ways of obtaining resources for a business:

Payment structure: in traditional financing, the loan is repaid in regular payments that include a portion of the principal and interest, while in RBF, a percentage of the company's future revenues is set as the form of payment.
Guarantees: In traditional financing, the lender may require guarantees, such as real estate or equipment, to secure the loan. In RBF, the lender usually does not require collateral, as repayment is based on future revenues.
Repayment terms: repayment terms in traditional financing are usually fixed and pre-established in the contract, whereas in RBF, the repayment term is usually established based on the company's revenues. This means that if the company has a low revenue month, the payment to the lender will also be lower.
Cost of financing: in traditional financing, the cost of financing is based on an interest rate and other fees associated with the loan, while in RBF, the cost is based on a percentage of future revenues. In some cases, the cost of financing in RBF may be higher than in traditional financing, but it offers more flexibility in repayment.
Approval rate: Revenue-based financing (RBF) typically has a higher approval ratio than traditional bank financing for digital businesses, especially in the case of eCommerce companies. The latter often have little working capital due to the nature of their business (upfront inventory purchases and marketing investments), which increases the perceived risk for traditional lenders.

Is Revenue-Based Finance right for your eCommerce?

While traditional financing may be more suitable for some companies, especially those that have a traditional business or have been operating in their market for many years, Revenue-Based Financing may offer a more flexible and accessible alternative for eCommerce startups.

In general, RBF can be an attractive option for eCommerce companies that have a stable and predictable revenue stream. In addition, those companies that need quick capital and do not want to compromise their assets or credit history may find RBF an ideal solution for financing their growth and expansion.

In addition, RBF can also be a good option for eCommerce companies that want to maintain control of their business. If your startup is at an early stage and you don't want to dilute ownership or cede control of the company to an investor, RBF can be a good option.

However, as we have already noted, Revenue-Based Finance is not a suitable financing method for all companies, especially those that have a high level of fixed costs or have a low revenue growth rate.

But, in addition, those companies with a high dependence on individual customers may not be eligible for Revenue-Based Finance, as revenue diversification is an important factor in assessing the company's ability to generate revenue.

Finally, companies that have a business model with a short life cycle will also not be suitable for this type of financing, as the payback period may be longer than the useful life of the product or service they offer.

In short, it is important for companies to carefully assess their financial needs and their ability to comply with the terms of the agreement before resorting to Revenue-Based Finance as a method of financing.