Revenue Based Financing
What is revenue based financing?
Revenue-based financing (RBF) is a type of business funding in which a company secures capital by selling rights to their future projected revenue streams at a discount. This is a win-win for both parties, as the startup receiving the capital can eliminate the time gap between customer-go-live and the eventual bump to their top-line revenue, and the financer generates a return.
How does revenue based financing work?
Revenue based financing is an agreement between a company and an investor who purchases the company's future projected revenue streams at a discounted rate. The application process typically takes just a few minutes, with funding often being approved within two business days (although some providers take weeks)..
At a high-level the process typically consists of:
- Onboarding - Register for an account, and enter the basics: company information, traction and capital needs/plans.
- Data Connection - Securely connect your bank accounts, accounting systems, and billing/subscriptions platform.
- Offer Selection - Receive a financing offer, sign off on the terms, select a deposit location and receive access to your capital.
- Begin Repayment - The repayments are automatically pulled from the original deposit account each month. The repayment amount can be fixed or variable based on monthly revenue.
What are the types of revenue based financing?
There are two types of revenue based financing: true revenue based financing, which is a loan that comes with fixed monthly repayments or repayment as % of cash receipts, and receivables financing. Within receivables financing, there are sub categories: (1) receivables factoring, and (2) merchant cash advances (MCA). The main difference being the sale of individual invoices (factoring) vs a cash advance on future projected revenue streams.
- Receivables factoring - the sale of individual invoices to an entity or investor. If the specific contract sold falls through, it needs to be replaced with another. You receive an offer, pay an initiation fee and then pay back the amount plus interest over 6-12months.
- Merchant cash advance - the entire business including its fundamentals (ARR, Burn, and Cash in Bank) are evaluated. You receive a discounted cash advance and pay it back via equal installments over 6-18months. There is no interest.
What companies are a good fit for revenue based financing?
Companies that have highly predictable or recurring revenue streams (such as monthly subscriptions), and increasing top line revenue are a strong fit for revenue based financing. A few more specific characteristics of startups that are a good fit revenue based financing include:
- CAC payback period less than 12 months
- High ROI from ad spend and other CAC channels
- Opportunity to accelerate growth by hiring sales personnel
- High AR and low liquidity
- High working capital and low liquidity
- 6+ months of remaining runway
What are the typical use cases for revenue based financing?
Startups primarily use revenue based financing to accelerate their growth, extend their runway, or optimize their capital stack. By leveraging RBF, startups can pull forward years worth of revenue to satisfy their cash needs today. Some specific use cases include: investing in product, scaling business operations, making a strategic hire, cleaning up the cap table, and more.
What are the typical requirements for revenue based financing?
The qualifications for revenue based financing varies by provider, but typically include requirements for annual revenue, recurring revenues, and remaining runway. At Arc, we require the following:
- At least 6 months of runway determined by cash on the balance sheet divided by monthly net burn
- At least $10k in MRR for the past 6 months
- US domiciled or have a US entity with a US bank account
Learn more here.
How much money does a company receive from revenue based financing?
The amount of capital a company can receive is highly dependent on its annual recurring revenue (ARR). For new customers providers can typically finance 20%-50% of ARR, but for repeat customers they sometimes go up to 70%+. Startups typically receive between $25,000 and $2 million, but they can receive up to $5 million with an Arc Advance.
What does revenue based financing cost?
The cost of revenue based financing is highly dependent on the provider you select, the type of funding you pursue (factoring vs financing), the payback period (e.g. 6 months vs 12 months), and your business fundamentals. Ultimately, it is priced based on the credit risk profile of the business.
How does revenue based financing compare to other financing alternatives?
At a high level, revenue based financing is non-dilutive and it is not debt. RBF enables startups to scale sooner, on their terms, and without restriction.
Revenue based financing vs venture capital
Equity financing is the exchange of ownership in the company for growth capital. In the early days of a startup, this is typically the only financing option available. As the company matures and generates more revenue, it becomes increasingly more costly, and in the event of an exit, founders miss out on a significant portion of the upside.
With revenue based financing, founders do not give up a portion of their equity and they know exactly what the total cost of the capital is at that moment. There are no hidden fees and there is no long-term impact on the cap table.
Additionally, during rising interest rate environments, VCs tighten up, revenue multiples come down, and subsequently, valuations plummet. Meaning that the cost of equity can go up 50% virtually overnight, whereas the cost of funding from RBF may only rise a few basis points.
Learn more here.
Revenue based financing vs venture debt
Traditional debt financing is plagued with restrictive covenants, warrants, and personal guarantees. Additionally, the agreements are typically hundreds of pages and require lawyers to negotiate the terms, resulting in hundreds of thousands in unexpected fees, and months of delay between the initial conversation and the eventual funding.
Unlike the offline nature of venture debt, with revenue based financing you can typically onboard in minutes and get funded within 48hrs. In addition, you know exactly what the total cost of capital is upfront, there typically isn’t: warrant coverage, additional "fees", a liens on assets, a risk of bankruptcy/insolvency, restrictions on the use of funding, or negative covenants.
The other major benefit of RBF is that it does not sit senior to VD and other debt, so there are much lower hurdles to accessing capital from it.
Learn more here.
What are the benefits of revenue based financing?
Revenue based financing is non-dilutive in nature, so founders and early employees can maintain control over the company they have worked so hard to build.
Unlike other financing products including venture debt, there are no restrictive covenants, warrants, or personal guarantees.
With revenue based financing, you typically know exactly what the total cost of capital is upfront, so there are no surprises later. With Arc, there are no hidden fees and unlike traditional venture debt, you don’t have to hire a team of lawyers to negotiate the terms of a 200 page contract.
That said, it's important to note that some RBF providers do not have transparent pricing—the % of cash receipts payment structure isn’t clear, so it can end up having a much higher APR than originally advertised if the startup grows fast.
Consistent Payment Terms
When you take on RBF you receive a fixed payment term (between 6-18 months) and you pay the same amount monthly because there are no hidden fees.
With RBF through Arc you can apply in seconds and get a decision within 48hrs.
What are the drawbacks of revenue based financing?
Revenue is Required
Due to the nature of revenue based financing, businesses must generate revenue to unlock the capital. RBF is not appropriate for pre-revenue business. Depending on the repayment structure (i.e. royalty percentage rate) the effective cost of capital can be high for businesses that grow quickly and have an RBF Loan.
Smaller Loan Amounts
The amount of capital a startup can raise from revenue based financing is based on their annual recurring revenues (ARR). In general, RBF providers will finance up to 60% of a company’s annual or monthly recurring revenue. As a company’s ARR grows, so too does the amount that they can receive from a RBF provider.
Who are the top providers of revenue based financing?
There are a handful of companies that provide revenue based financing. The type, terms, fees, and payback period vary from company to company.
- Arc - provides up to $50M in non-dilutive funding and a set of purpose-built financial tools to help startups save, spend, and efficiently deploy their capital.
- Pipe - operates a RBF marketplace where startups can sell their individual invoices (factoring) to investors on the platform.
- ClearCo - provides capital for founders to fund their business.
- Lighter Capital - provides funding for early-stage tech companies.
Is revenue based financing right for me?
Revenue based financing is perfect for startups that are in between rounds and need capital to carry them over, or those who have recently closed a round of equity funding and are looking for additional capital. It’s also great for startups that are looking to accelerate their growth, extend their runway, and optimize their capital stack..
How can I get started with revenue based financing?
To see if you qualify for up to $50M in funding, apply today.
Other commonly asked questions about revenue based financing:
Is there a difference between revenue based funding and revenue based financing?
There is no difference between revenue based funding and revenue based financing. However, there is a difference between receivables financing and receivables factoring (see the section above).
At what stage of funding does a company typically receive revenue based financing?
Startups throughout their entire lifecycle are eligible for RBF assuming they meet the minimum requirements. That said, the majority of companies that take on RBF are either bootstrapped or between their Seed - Series C round.
Can you obtain a revenue based financing without revenue?
No, it is not possible to receive RBF without revenue. If you are pre-revenue, reach out and we’ll connect you with one of our venture capital, or or other non-dilutive financing partners..
Is revenue based financing a loan? Is revenue based financing debt?
Revenue based financing is typically not structured as a loan or debt, so it may not come with covenants, warrants or personal guarantees. As always, consult your legal council prior to entering into any revenue based financing contracts so you understand how your specific agreement is structured and what requirements are present.
How does accounting work for revenue based financing?
Receivables financing is typically considered a merchant cash advance, and is recorded as an expense. Another subset of receivables financing is receivables factoring, which is typically recorded with three entries: Factored Invoices Sold, Factored Invoice Reserve, and Factored Fees Expense.
This is not financial or accounting advice. Arc does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only. You should consult your own tax, legal and accounting advisors before engaging in any transaction.