Revenue Based Financing as Risk-Free Capital

Revenue based financing (RBF), or royalty-based financing, is a way for businesses to raise capital without putting equity or collateral on the line.

If you’re a business owner looking for a non-dilutive, risk-free way of raising capital, revenue-based financing might be for you.

How Does Revenue-Based Financing Work?

In a typical RBF model, investors provide capital to businesses in exchange for a percentage of their ongoing gross revenue.

The investor provides a lump sum of capital to the business, and instead of fixed monthly payments, the business pays back a predetermined percentage of its gross revenue each month.

This percentage typically ranges from 5% to 10% but can vary depending on the deal terms.

Since revenue-based financing requires trust and transparency on both sides of the transaction, it can be wise to route transactions through an escrow account.

Speak with our Escrow Experts

The flow of funds in a revenue-based financing transaction goes as follows:

Benefits of Revenue Based Financing

• Flexible and aligned: Payments scale with revenue, making it manageable during low-revenue periods.
• Faster access to capital: Compared to traditional financing, the process is often quicker and less demanding.
• Maintains ownership: Founders retain full control over the company’s decisions and direction since equity ownership is not diluted.
• Focus on growth: Investors incentivized by revenue success, encouraging growth initiatives.

Risks in Revenue Based Financing

• Higher effective interest rate: The total amount paid back can be higher compared to traditional debt due to the ongoing revenue share.
• Limited investment size: Available funding amounts tend to be smaller than conventional financing options.
• Exit possibilities: Different structures may impact future fundraising rounds or exit strategies.
• Need for disclosures: Some investors may take a high level of interest in the business and may require full transparency and disclosures.

How does RazorpayX Escrow+ close gaps in revenue based financing? Speak with our experts. 

Is Revenue-Based Financing Right For You?

If you fulfil most of the following requirements, revenue-based financing might be the right fit for your capital needs.

✅ Consistent and upward revenue growth with a predictable revenue model, like SaaS, D2C, e-commerce

✅ Seeking capital for rapid growth

✅ Unwilling to engage with traditional funding

✅ Desire to avoid diluting equity and maintain full control over business

✅ Confident in ability to scale and generate increasing revenue

However, if your business checks these following boxes, enter into a revenue-based financing deal with caution.

❌ Need for large funding amounts, since RBF deals are typically for smaller amounts.

❌ Unpredictable or volatile revenue may make payments inconsistent and lead to investor concerns

❌ Unwillingness to share financial data; since RBF deals require high levels of transparency

❌ Looking only for short-term growth; since RBF is more suited to long-term goals

Speak with our Escrow Experts

Revenue-Based Financing Term Sheet

A crucial part of an RBF agreement is the revenue-based financing term sheet. It is a blueprint outlining the principal amount, fees and repayment schedule as decided between the investor and the business.

Here are the components of an RBF term sheet.

• Funding amount: The total amount of capital the business will receive from the lender.
• Revenue share percentage: The percentage of gross revenue the business will pay back to the lender each month. This typically ranges from 5% to 10% but can vary depending on the deal.
• Minimum payment: A guaranteed minimum amount the business must pay each month, even if their revenue falls below a certain threshold. This provides the lender with some security.
• Repayment period: The timeframe within which the business must fully repay the funding and revenue share.
• Fees: Additional charges associated with the financing, such as origination fees, transaction fees, and late payment fees.
• Investment covenants: Certain conditions or milestones the business must achieve to remain in good standing with the lender.
• Exit strategy: Provisions outlining how the business can ultimately “graduate” from the RBF and potentially refinance or seek further funding through traditional means.

Revenue-Based Financing vs Traditional Financing