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Revenue-Based Finance | What You Should Know
Among the alternative methods of funding, revenue-based finance (also called ‘royalty financing’) offers businesses access to non-dilutive capital without the risk of personal director's guarantees or the costs of interest rates.
But what is revenue-based finance (RBF)? How does it work, and is it valuable for your business? At Clifton Private Finance we have the answers.
And to get a bespoke quote for your requirements, use our calculator below:
Contents
Revenue-Based Finance at a Glance
How Revenue-Based Finance is Structured
Why Use Revenue-Based Finance - Who is RBF For?
Revenue-Based Finance vs. Business Loans
Recent Business Finance Case Studies
Revenue-Based Finance vs. Capital Investment
Businesses that Benefit from Revenue-Based Finance
4 Downsides to Revenue-Based Finance
Obtaining Revenue-Based Finance with Clifton Private Finance
Revenue-Based Finance at a Glance
The concept of revenue-based finance is simple: money is lent to the business and is repaid as a percentage of income rather than a set monthly repayment.
RBF sits between a traditional interest-based business loan and venture capital, offering a comfortable middle ground with a range of benefits.
Variable Collection
Variable collection RBF is the most common type and has no end date on repayments - payments continue until the full repayment is made.
Flat Fee
Flat fee RBF has a set term. Payments are made each month until the term ends. This may result in greater amounts being repaid than variable collection, or, if the business struggles, it could end with only a portion of the original loan being repaid. Either way, the debt is cleared at the end of the term.
How Revenue-Based Finance is Structured
The Royalty - How Much Do You Pay Back with RBF?
Variable Collection
Rather than using interest rates as a way for the lender to make profit on the loan, variable collection RBF is structured with a royalty payment that is calculated as a multiplier on the principal.
Depending on the terms of the loan, this can be between 1.1x and 3.0x the original loan.
For example, a company borrowing £100,000 as RBF with a 1.2x multiplier will pay back a total of £120,000.
Variable collection revenue-based finance is thus very easy to calculate.
Flat Fee
Flat fee RBF has no defined repayment total, but is paid continually until the end of the term. This can result in both larger amounts being repaid (if the business does well), or a far smaller return to the lender if the business does not meet expectations.
The Terms - How Long is an RBF Loan?
Rather than paying a set monthly payment, revenue-based finance is paid back as a percentage of your gross monthly turnover.
This makes the repayment structure always affordable, as in a good month with larger income a more significant repayment is made; however, in weaker months when income drops, the stress presented to the business is lowered in turn.
Variable Collection
With variable collection RBF, the repayments end only when the total owed is repaid. This is the capital invested plus the royalty multiplier. There is no set term, so if the company does well and payments are high, the loan will be repaid sooner than if the business makes less money and repayments are small.
The following illustrates an example, with an initial capital loan of £100,000, a royalty multiplier of 1.2x, and an agreed repayment percentage of 10%. The balance at the start of repayments is £120,000.
Variable collection revenue-based finance example:
|
Month |
Turnover (Gross) |
Repayment (10%) |
Balance |
|
April (year one) |
£50,000 |
£5,000 |
£115,000 |
|
May |
£35,000 |
£3,500 |
£111,500 |
|
June |
£63,000 |
£6,300 |
£105,200 |
|
July |
£61,000 |
£6,100 |
£99,100 |
|
August |
£78,000 |
£7,800 |
£91,300 |
|
September |
£55,000 |
£5,500 |
£85,800 |
|
… |
… |
… |
… |
|
January (year three) |
£72,000 |
£7,200 |
£17,300 |
|
February |
£68,000 |
£6,800 |
£10,500 |
|
March |
£71,000 |
£7,100 |
£3,400 |
|
April |
£61,000 |
£3,400 (last payment) |
£0 |
Flat Fee
For flat fee RBF, the structure is such that the end of the repayments comes when the agreed term is met.
Repayment percentages tend to be a lot lower than variable collection RBF, making the monthly liability smaller and the debt a lot easier for the business to manage.
For example, the same loan example provided above may be set to a five-year term at 3% of gross turnover.
Using those figures to average a five-year repayment with no growth in the business during that time, only £83,700 would be repaid before the loan term expires.
However, businesses rarely stagnate in such a way. Assuming an average growth of 12% and an initial annual turnover of £600,000, repayments over the years would look more like the following:
Flat fee revenue-based finance example
|
Year |
Turnover (Gross) |
Repayment at 3% |
Total Repaid |
|
1 |
£600,000 |
£18,000 |
£18,000 |
|
2 |
£675,000 |
£20,250 |
£38,250 |
|
3 |
£755,000 |
£22,650 |
£60,900 |
|
4 |
£850,000 |
£25,500 |
£86,400 |
|
5 |
£950,000 |
£28,500 |
£114,900 |
For this reason, lenders are more likely to provide flat fee RBF for companies with a strong growth potential.
Why Use Revenue-Based Finance - Who is RBF For?
Revenue-based finance presents an alternative to both traditional loans and capital investment, taking some of the positives from each side of these arrangements to create a middle-ground that benefits many businesses.
In the main, revenue-based finance is best for companies that may struggle to provide a detailed financial history but have verifiable forecasting based on recurring revenue.
This makes it an ideal funding solution for tech businesses, such as SaaS, e-commerce, and other businesses that rely on a subscription model.
The capital raised by RBF is, therefore, a major factor for these business styles, providing the essential backing needed to market the business and expand accordingly.
See the latest market news below.
2024 Business Finance Market Update
In the past year, business finance saw significant growth, perhaps surprisingly driven by challenger lenders and alternative finance providers. Many of these lenders reached their largest milestones in 2024, primarily through supporting SMEs that may have struggled to access traditional funding elsewhere.
Businesses are continuing to face significant economic challenges carried over from 2023. High inflation, supply chain disruptions, and geopolitical tensions persist, which have complicated financial planning and made it difficult for businesses to acquire funding.
But the Bank of England has cut its base interest rate for the first time in 4 years, signalling a cautious shift toward economic stabilisation after years of inflationary pressure. Further cuts are anticipated, and businesses can expect a flurry of spending in the coming months.
As well as this, a number of banks and large firms seem to be racing to the finish line to implement generative AI and new technology that could streamline business and boost profits. Enhancing tech in banking looks like a win-win for lenders and borrowers, offering more personalised financial solutions and a quicker, more secure process.
In the tech industry, investments in AI are reshaping business. Tech giants like Alphabet, Amazon, and Microsoft have seen their market values surge, driven by the rush to implement AI.
Revenue-Based Finance vs. Business Loans
A traditional business loan will require the company to show long-term sustainability and a proven history of creditworthiness.
Where business credit history is lacking, a director’s guarantee is used to mitigate risk for the lender, moving that liability to the directors personally.
See also: Personal Guarantee Insurance
This is a model built around risk assessment, with lenders taking care to balance risk vs. reward, offering loans with higher interest rates to those who are deemed a greater risk.
Liability is never passed from the business to the owners or directors, making it a far less risky form of capital injection than a traditional loan for many companies.
This does mean that in some cases, the cost-effectiveness of a RBF loan vs. a traditional business loan is squarely in favour of the traditional system.
Royalty multipliers for risky investments can be extremely high, with some RBF deals for startup tech companies reaching as high as 3.0x - far higher than any but the most extreme bank loan.
However, for companies confident in their growth strategy, even these large royalties are not off-putting, as they represent a clear path to success. Certainly, a traditional bank would be unlikely to offer any financing deal in that instance.
Compared to a traditional business loan, revenue-based finance offers:
- A rapid application and approval process
- Loans without extensive credit history
- No director’s or owner’s guarantees
- No asset-based collateral
- Large capital sums
- Flexible repayment based on turnover to avoid cash flow stress
Recent Business Finance Case Studies
Revenue-Based Finance vs. Capital Investment
The other model that closely resembles (and offers an alternative to) RBF is that of capital investment or equity financing. Both angel investment and venture capital are avenues that businesses considering RBF may want to consider.
Dilutive investment is that where capital is gained in exchange for a share in ownership of the business; non-dilutive investment is repaid in other ways, leaving the current owners and shareholders with their investment untouched.
Dilutive capital does not have to be repaid, and for this reason, many startups and growing tech companies find it extremely beneficial. However, in the long-term, a dilution of shares also means a smaller cut of profits; entrepreneurs with true passion and belief in their business plan may see this as a significant downside.
The criteria for obtaining investment capital and revenue-based finance are very similar; angel investors and VCs use near-identical risk assessment sensibilities to those in the RBF sector. This is why RBF and capital investment are often seen as closely linked.
However, by being non-dilutive, RBF is often considered a more desirable option. Even when large royalty multipliers are fixed, the shareholders know that they will, one day, be repaid in full and part of the company history.
Balancing between dilutive and non-dilutive investment is a complicated topic that benefits from outside advice. At Clifton Private Finance, our team of revenue-based finance experts are available to discuss the finer nuances of capital investment vs. RBF with you at any time - contact us today.
In short, when balanced against capital investment, revenue-based financing provides:
Businesses that Benefit from Revenue-Based Finance
Revenue-based finance presents a particularly strong option for the following businesses:
- E-commerce - Purchasing stock to build an e-commerce business is an established use of revenue-based finance. With customer sales figures a key metric to forecasting, an existing or well-researched customer base can be used to leverage the required RBF loan.
- Hospitality - With seasonal cash flow issues often needing help from RBF-style funding, the hospitality has long utilised variable collection revenue-based finance in the form of merchant cash advance, which uses predicted future card transactions to provide immediate financing.
- Retail - Like the hospitality industry, the direct-to-customer card transaction nature of retail outlets make utilising merchant cash advance RBF a quick and easy solution to current financial difficulties. Speak to an advisor at Clifton Private Finance to see how we can help you acquire effective merchant cash advance funding.
- SaaS - Built on a subscription model, Software-as-a-Service businesses are able to utilise RBF funding to provide essential capital for every stage of the business lifecycle. With RBF startup funding and expansion finance both a key part of the SaaS funding portfolio. Specialist SaaS revenue-based finance exists to support this booming industry.
4 Downsides to Revenue-Based Finance
Revenue-based finance provides a powerful alternative to traditional financing, but it is not without its cons. 4 of the downsides to RBF include:
1. Increased cost to the business
In many cases, especially those where a strong credit history exists or there are valuable business assets that can be leveraged for asset financing, a traditional business loan is a cheaper alternative.
It is always worth comparing directly quoted figures to determine the right course of action for your business. As finance brokers and advisors, we at Clifton Private Finance can help you develop a side-by-side comparison of the long-term impact of RBF vs. loan financing.
2. Requires an established revenue stream
While RBF does exist for young and startup companies, investors and lending platforms will be keen to see immediate revenue to offset risk. This means that RBF is generally unsuitable for businesses that are in the research and development phase and are yet to launch a product.
3. Loan value based on turnover
As repaying RBF is based on a percentage of your gross monthly turnover, this figure is also used to determine the maximum loan size available to you. Thus, companies with low turnover will find the size of available revenue-based finance limited.
4. Cash flow pressure
Though the repayment structure of RBF represents a flexible percentage-based approach, for some businesses this can increase, rather than decrease the debt service stress on the monthly cash flow.
For companies with traditional loans, increased monthly revenue significantly lightens the load on debt liability, but for those using RBF, the size of the repayment increases proportionally. Balancing this structure is another important stage for business owners looking to revenue-based finance.
Obtaining Revenue-Based Finance with Clifton Private Finance
Clifton Private Finance is an established specialist business finance advisory and broker service.
Our experts in revenue-based finance will comprehensively overview the full marketplace of RBF lenders to find those most suitable for your business need, bringing you the widest spread of available products and the best deals possible.
Speak to one of the specialist revenue-based finance team at Clifton PF today.
Or to get a bespoke quote for your requirements, use our calculator below:
