In the United States, the revenue-based financing (RBF) market is projected to grow from $5.77 billion in 2024 to $9.81 billion in 2025, reflecting a compound annual growth rate (CAGR) of 70.1%. This rapid growth indicates that more businesses are looking to RBF as a way to obtain funds. Many small businesses like RBF because it adjusts based on their revenue. As it gets harder to get traditional funding, RBF becomes a good choice for businesses that need money to grow.
What is Revenue-Based Financing?
Revenue-based financing (RBF) allows businesses to get money in exchange for a percentage of their future revenue. RBF differs from other loans in that they don’t require fixed monthly payments or interest. Instead, businesses should repay a certain amount of their monthly earnings until the loan is fully paid, including the original amount and an extra fee.
How Revenue-Based Financing Works
Revenue-based financing involves businesses receiving a lump sum of capital in return for a percentage of their monthly revenue. Payments are based on how a business makes sales, and those payments rise and fall with a business’s performance.
For example, if a business receives $100,000 in funding and agrees to repay 5% of its sales:
- If the business makes $50,000 in sales, it repays $2,500 (5% of $50,000).
- If sales increase to $100,000, the repayment would be $5,000.
- Repayments continue until the business repays a set multiple of the original amount, such as 1.5 times the loan.
With no equity given up or collateral required, businesses repay more when sales are high and less when sales are low with this flexible system.
Revenue-Based Financing vs. Other Options
Revenue-based financing is more flexible than traditional loans and equity financing. Here's a comparison of how each one works:
How Does Revenue-Based Financing Benefit Small Businesses?
Revenue-based financing offers several advantages for small businesses, making it a great choice for those in need of capital. Here are its advantages for businesses:
- Quick access to capital: Businesses can get capital quickly. Thus, they can take advantage of opportunities right away or expand as quickly as possible.
- Repayments tied to sales: Repayments are based on sales, so the receivable amount becomes low if sales are low, helping to ease the financial burden.
- No collateral required: Unlike traditional loans, RBF does not need collateral, which means that small businesses are able to get loans without providing assets.
- No equity loss: Business owners don’t need to give up any ownership in their company, allowing them to retain full control.
RBF’s flexibility makes it a popular choice for a business that needs simplicity and manageability when it comes to accessing capital.
What Are the Types of Revenue-Based Finance?
Revenue-based financing comes in many forms, each suited for different business models. These include:
1. Traditional RBF
This is the most common form of financing where a business gets a lump sum of money and agrees to pay a fixed percentage of its sales. Repayment is based on how much the business generates each month.
2. Subscription-based RBF
This is for businesses that generate stable income, for example, SaaS or subscription services. The repayment is based on the regular monthly income of the business.
3. Hybrid RBF
This combines traditional RBF and equity financing. It offers more flexible repayment terms but can involve giving up a small bit of the business’s ownership.
How Drip Capital Can Help
Drip Capital is a prominent provider of revenue-based financing for small and medium-sized businesses, particularly those involved in international trade. Their funding solutions are fast and flexible, requiring minimal paperwork and no collateral. Repayments are structured as a percentage of future revenue, making them scalable to businesses' sales performance. Drip Capital offers businesses the capital they need while allowing them to retain full control and ownership without giving up equity.
Frequently Asked Questions
1. How much Revenue-Based Financing can you secure?
It depends on how much your business brings in monthly and how it could grow each month. Lenders offer a loan based on a percentage of sales, with higher amounts for stronger, consistent revenue.
2. Who can benefit from Revenue-Based Finance?
Revenue-based financing is most suitable for small and medium companies with steady revenue streams, specifically e-commerce, SaaS, subscription, and retail businesses. This is especially useful for businesses with fluctuating or seasonal sales but still require capital for growth.
3. Can we get revenue-based financing without revenue?
Unfortunately, companies without consistent income won’t always qualify for revenue-based financing. The repayment is based on sales; therefore, it’s important to have a steady revenue stream for this type of financing.
4. What are the disadvantages of Revenue-Based Financing?
Because revenue-based financing requires higher repayment multiples, it can be more expensive than traditional loans. Cash flow can also be impacted by the percentage of revenue you share with investors. Additionally, RBF is better for short-term needs, making it less ideal for long-term financing.
