One of the challenges facing SME leaders as they evaluate if financing is right for their business, is the question around repayments. Many businesses face large seasonal swings in revenue, making fixed monthly repayments a challenge to commit to.
Revenue-based financing (RBF) is one of the newer business models that has emerged to solve this challenge and fund growth of small and medium-sized businesses (SMEs). In this article we will demystify RBF, explain how it works and for which kinds of SMEs this model might be value-adding.
What is Revenue-Based Financing?
RBF is a model where a percentage of your sales is taken to repay your loan. The benefit of this approach is that you don’t need to worry about fixed monthly payments coming out of your bank account, a particular headache for seasonal businesses. Your repayments flex up or down depending on how your business is performing. RBF also does not require guarantees or collateral to be put down by your business.
How Does It Work?
The application process for RBF will include connecting software that you use on a regular basis. Data from your business is used in the underwriting process. Some examples include:
- Payment gateways containing data on your transactional revenue
- Your Google Ad account containing data on your ROI on advertising spend
- Your Amazon seller account that contains data on your sales and inventory.
The value proposition from most companies offering RBF is as a result of those data integrations they can make an offer in 24 hours and your repayments are efficiently set up.
If you receive an offer, you and the lending company agree on the percentage of revenue that will be deducted to repay your loan and how often. The percentages typically range from 5 to 20% and frequency can be from daily to monthly. Once the loan is repaid, the lending company stops deducting this percentage of sales.
Is RBF RIght For Me?
Not all SME business models are right for RBF. They require a method by which the lending company can connect to revenue streams in an automated way, for example through point-of-sale (POS) terminals or online payment gateways.
Some businesses that have benefited from RBF include:
- Subscription businesses, securing annual revenue upfront
- For online sellers, funding of inventory to free up cash flow for new lines of business
- For funding of marketing campaigns, particularly during peak periods like Black Wednesday, Eid or Christmas
RBF is not for everyone but by understanding how it works, we hope to demystify some of the financial jargon and help you understand if this tool can be another secret weapon in growing your business.