How Does Revenue-Based Financing Support Sustainable Start-up Growth?

What Is Revenue-Based Financing?

Revenue-based financing or royalty-based financing is a potential method of raising capital from a firm’s investors to meet business-oriented requirements. In exchange for the investment amount, individuals are entitled to receive a portion of the firm’s projected earnings, based on previous sales figures.

Investors continue to receive such pay-outs until they obtain a predetermined amount. Generally, the said predetermined amount is a multiple of their invested sum and tends to range between at least 3 to 5 times the principal investment.

Typically, such a funding option comes with variable repayment tenure as the same depends on the percentage of revenue that a firm generates in a month or so. The royalty-based financing serves as a potent alternative to other conventional equity-based funding options. 

Also, the fact that revenue-based funding does not require businesses to give up a portion of their ownership, appeals more to the start-up owners. It must be noted that revenue-based funding is a blend of debt and equity financing. However, there are no fixed pay-outs, and no interest is generated on the unpaid balance. 

How Does Revenue-Based Financing Work?

 Enterprises can avail revenue-based financing services from KredX easily and access immediate funds by pledging a share of their anticipated monthly or annual revenue. Nonetheless, to maximise the utility of this financing option, one must understand how it works.

These pointers below enumerate the process of how revenue-based funding works –

• A start-up approaches a leading financier to avail a loan against the recurring revenue.
• The financier scrutinises the recurring revenue expenses to estimate their future earnings and subsequently, decide on a specific percentage of revenue. 
• The firm uses the funds availed by the facility to meet specific business-related requirements.
• To repay the borrowed sum, a fixed percentage of the company’s revenue is paid out to the financier. 

Typically, when a company generates surplus revenue, the borrowed sum is paid off quicker. However, during the seasonal lows of the business cycle, when the income generated is marginal, it may take a little longer to pay off the debt.

Why Revenue-Based Financing?

Revenue-based financing is essentially a growth capital, availed to meet cash requirements related to –

• Sales and marketing initiatives.
• Expansion of operational unit or scale of operation.
• Hiring talent and providing them with proper training.

Benefits Of Revenue Based Financing For Start-Ups:

Start-ups often find it difficult to avail a business loan sanctioned from a lending institution, due to lack of credit history or low credit score. However, KredX follows relatively less stringent requirements to sanction funds to the start-up owners. 

Other than that, here’s how start-ups benefit from revenue-based funding –

• Effective: It helps to meet immediate cash flow requirements. One can access funds through this option and facilitate their capital growth.
• Less Risky: Start-ups are not required to pledge collateral to avail revenue-based financing. Also, firm owners continue to retain their ownership and control over the enterprise and its managerial as well as financial decisions, which means there is no equity dilution.
• Flexible: Typically, when the revenue is less, the repayment amount is also less.
• Transparent: Financiers have a clear idea about repayments and the terms of clearing the same. 
• Longer Repayment Term: The repayment term is usually relaxed and can be opted for long term. It allows businesses to pay off their debt without straining monthly revenue. 

Collectively, these features come in handy for start-ups and allow them to witness organic growth and sustainable profitability in their venture. However, start-ups should also factor in various shortcomings such ase access to limited cash and associated fees, before availing this facility. Doing so, they will be able to come up with necessary strategies that will help to minimise the impact of the drawbacks. 

Nonetheless, entrepreneurs who avail revenue-based financing services offered by KredX receive easy terms of repayment and quality integrated cash flow solutions.