Revenue Based Finance is positioned as An alternative for access to financing for digital startups, which can be a challenge because they do not meet the requirements imposed by traditional banking.
But what does this formula consist of? Next, we present you the operation and advantages of this business financing model.
What is Revenue Based Finance?
Revenue Based Finance (RBF) translates as “income-based financing”.
Is about an innovative model of access to funds for business development and consists of obtaining capital in exchange for a participation in future income.
In other words, if you are wondering what the RBF is, it is simply an agreement in which the company repays the borrowed amounts based on profits. If the business develops properly and the company generates income, the loan is repaid in the usual way. However, should growth be cut short, the payments are reduced.
In this way, it seeks to harmonize business benefits with the amortization of the amounts borrowed. Fees paid are not fixed: They are established based on a percentage of future income.
How does the RBF work?
To access Revenue Based Financing, the startup must follow these 5 easy steps:
- Analyze the market and identify the RBF provider more appropriate
- company evaluation: through registration, the RBF provider will carry out data analysis through technological platforms (big data) and decide if the operation is viable and under what conditions.
- Negotiation of financing terms: After the initial evaluation, it is necessary to negotiate the financing conditions (capital to be lent, term, percentage of income that will be used for payment, etc.).
- disbursement of funds: at the time the agreement is signed, the RBF service provider contributes the necessary funds for the development of the company.
- Pay based on income: as the business activity takes place, the agreed percentage is allocated to the investor until the amortization of the borrowed capital is completed.
What are the advantages of Revenue Based Financing?
The revenue-based financing model has a number of advantages for both investors and companies which are decided by this formula:
- Access fast financing: startups have the possibility of raising funds for their purposes without having to comply with rigid procedures or strict requirements, typical of bank financing. Small businesses can access credit.
- Simplicity: As you will have been able to verify in the previous section, the process to request an RBF is not complex. The analysis of the company is done through a data analysis.
- Flexibility: payments are not fixed, which reduces the financial pressure on companies. It is not necessary to repay the capital in a certain time and manner, regardless of business results.
- You do not need a personal guarantee: It is not necessary for the employer to provide additional guarantees or personal guarantee. We insist: data analysis is the only key that indicates the viability of the operation.
- No loss of control and no dilution of ownership: The Revenue Based Finance financing model does not imply the entry of new partners into the company. The shareholders retain the 100% of their ownership.
Is the RBF model suitable for all companies?
The Revenue Based Finance model is useful for start-ups, with a marked technological character and that cannot be valued based on traditional criteria. In these cases, it is essential to find innovative financial sources.
However, there are different RBF providers and it is necessary to analyze which is the most appropriate based on the characteristics of the market, sector and the particular needs of the company itself.
For this reason, in Alter Finance it helps you to identify the most suitable RBF provider and we provide advice in order to offer an agile and personalized solution to the particularities of each client.