Understanding Revenue-Based Financing: A Flexible Funding Option for Startups
A startup at any point faces the critical challenge of accessing flexible and scalable funding. Traditional loans are not always the most suitable option, mainly considering both high interest rates and harsher terms of repayment. In such a situation, alternative financing forms like Revenue-Based Financing (RBF) come to the rescue. Although RBF has come to be in vogue, the knowledge of how bill discounting can complement it empowers startups with a holistic approach toward cash flow management and growth. In this blog, we will get deep into the concept of RBF, describe the benefits, and find out how, in fact, bill discounting can turn this into a game-changer in this very financial model.
What is Revenue-Based Financing?
Revenue-Based Financing (RBF) is capital extended to a company in exchange for an agreed-upon percentage of its future revenues. The payments are not fixed as with a typical bank loan; they vary with the performance of the business. In essence, that means that when the going is good, more is repaid; when the going is really tough, less is repaid. Now, flexibility is what really draws startups, especially those with fluctuating income streams, to RBF.
How Does Revenue-Based Financing Work?
In an RBF contract, upfront working capital is given to the business at a cost wherein the lender agrees to a fixed percentage of the company’s monthly revenues until the capital is returned, typically at a substantial growth to ensure the profit of the lender. For instance, if a company raises ₹ ten lakhs through an RBF, it would get into an RBF contract based on which ₹ 15 lakhs might be repaid over time by giving a 5% share of the monthly revenue.
The repayment continues until the full amount is paid off. The very flexible nature of this model ensures that startups are not burdened with fixed repayments during lean months, and this is one of the major advantages of this model.
The Role of Bill Discounting in Revenue-based Financing
While RBF does offer flexibility of repayment, many startups still suffer from liquidity problems, especially when dealing with delayed payments from clients. This is where Invoice discounting comes into play. Invoice discounting is an arrangement where businesses sell their outstanding invoices to a lender at a consideration much lower than their outright value in order to get instant cash. In addition to enhancing the cash flow cycle, it complements revenue-based financing with additional working capital.
For instance, startups that are in the growth stage, and with confirmed revenue-based financing, might always use it to convert pending invoices into cash. This guarantees that they have enough liquidity to run their day-to-day operations smoothly, ensuring that even when revenue is uneven or delayed, running operations is not a problem.
How Bill Discounting Works
Perhaps the most straightforward definition of bill discounting, the other name for it, is invoice discounting. Put simply, a business will present its invoices to a financial institution—you guessed it: KredX, which will advance a part of its value, usually 80% to 90%. If such is the case, then the remaining percentage is kept by the lender until the customer eventually pays the invoice. After the payment is received, the lender just deducts a small fee, and the business gets the balance amount.
For startups that are into revenue-based financing, consideration of bill discounting as part of their financing strategy shall turn around their business. It provides ready working capital without debt or equity dilution. More importantly, it aligns well with RBF’s flexible repayment structure, ensuring smooth management of cash flow.
Benefits of Integrating Revenue-Based Financing with Bill Discounting
Better Cash Flow: Every startup’s biggest challenge is inconsistent cash flow flow. This can be most effectively resolved by clubbing RBF with bill discounting. If RBF provides capital with convenient payback, Invoice Discounting offers instant cash against your outstanding invoices.
No Dilution of Equity: Added the fact that both RBF and bill discounting are non-dilutive financing methods, which means startups can get equity financing without both taking on debt or giving up ownership or control. This helps the founders keep the equity within their company as they scale.
Fast and Modifiable: Startups are always in need of funding that grows with revenue. RBF is by nature fast, since its repayments grow with revenues. Businesses can also get working capital that grows based on invoice volume, when it is combined with bill discounting.
Easy Access to Funds: Invoice discounting promises ready cash, which could be of paramount importance for startups requiring instant working capital. Speedy dispensation of this facility complements RBF’s flexible repayment model to assure that startups are better off in their financial predicament without strain.
Reduced Financial Risk: Traditional loans come with fixed repayments that put a strain on startups during lean periods. This combination of RBF and bill discounting offers flexibility in repayment and also lowers financial risk, as payments are directly tied to revenue and invoice payments.
Use Cases: How Startups Can Leverage Bill Discounting with RBF
Below are some use cases for how startups in a range of sectors can leverage this novel combination of revenue-based financing and bill discounting.
E-commerce startups: In the realm of e-commerce, seasonal revenue fluctuations arise as part of everyday experience. With RBF, it ensures continuous cash availability with bill discounting support, which is available to convert delayed payments into cash even at the off-peak season.
SaaS companies: A lot of the time, this is a recurring revenue model, but certain clients may tend to delay their payments. This is true because flexibility in funding for such SaaS companies is changing rapidly in its need, while Invoice discounting to support pending offers may provide the quick liquidity needed.
Startups in Manufacturing: For firms in the manufacturing industry that face long payment cycles from their buyers, Invoice discounting can be an important tool for managing working capital requirements. Hence, RBF can be used to finance other growth activities, such as expansion of production or entry into new markets.
Why KredX is the Perfect Choice for Bill Discounting
For startups that consider bill discounting under their funding strategy, Seamless and Efficient Solution is what KredX offers. With a strong platform, KredX can offer immediate access to funds without incurring any debt against the unpaid invoice, and thus, it is going to help unlock working capital. It has performed instant funding against unpaid invoices for a quick unlock of working capital to combine the benefits of RBF with bill discounting.
Conclusion: The Perfect Combination for Startup Success
Undoubtedly, revenue-based financing helps in the flexibility and scalability of funding for startups. Bill discounting will help one better by way of ensuring the inflow of cash remains constant, though the revenue is stuck. Any startup, at any point in time, can get a continuous scale with financial stability by managing both these financing models.
Whether you are the founder of a startup with unconventional funding needs or an established business herself, and even if you want to optimise cash flow, a combo of revenue-based financing and invoice discounting could be the perfect fit. At KredX, we deal in designing a host of custom financial products for your business in addition to bill discounting, ensuring laughs for the growth of your business.
Ready to Unlock Flexible Funding? Find out how KredX can help you unlock accelerated cash flows, driven by Invoice discounting. Get in touch with us for a personalised consultation.
