Thread by @iamchrisani

What is revenue-based financing?

Revenue-based financing (RBF) refers to a means of raising funds, where investors provide capital, in return for a stipulated percentage of a company’s ongoing total revenue.

The amount to be repaid fluctuates with the borrower’s financial performance — going up when revenue increases and going down when it decreases.

Revenue-based financing can be seen as an alternative form of finance — that operates on a different model to traditional

equity-based investments, like angel investing and venture capital.

Revenue-based financing is also known as revenue-based funding, royalty-based financing, royalty financing and a revenue loan.

The revenue-based financing model has its roots in the oil industry. It was used by oil investors to finance oil and gas exploration. The model was then later applied to both the pharmaceutical and movie industries (Hollywood).

The use of RBF has risen considerably

in other sectors — specifically the technology or tech sector. For example, companies involved in software, SaaS, tech services, digital media and more.

With revenue-based financing companies get business capital — in exchange for a percentage of the

company’s future monthly revenues. The financing firm gets to claim their share of revenue — up until the business’s total debt is repaid in full.

Any money lent is not repaid with interest, instead repayments are calculated based on a certain multiple (or cap) —

that ensures that any returns are higher than what was initially invested.

RBF allows companies to retain ownership and full control. Depending on the lender, personal guarantees or “seats on the board” are not always required. Application processes also tend to be quick —

enabling lending decisions to be made quickly.

Businesses do not necessarily have to be profitable to receive funding — although they typically do have to be generating some sort of revenue. Where not profitable, a clear path to profitability will need to be shown.