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Revenue-based Financing: A Refuge in Uncertain Markets

Venture Capital investments—always tricky to secure—hit a 9 quarter low in Q3 ’22. Now inflation is at 40-year highs. Interest rates have spiked. And stocks have been in a bear market. 

The result of this storm? Founders looking for financing face even more challenges—including formally withdrawn offers and even investors ghosting on their commitments. 

But VC isn’t the only way to raise money. Revenue-based financing (RBF) offers a unique, non-dilutive solution that supports growth as a compliment, or even a substitute for VC, in tough markets. Here are three ways revenue-based financing can offer Entrepreneurs an opportunity to stay the course in a difficult venture capital market. 

#1: Revenue-based Financing Smooths Cash Flow

Founders of cyclical or seasonal businesses are used to balancing a dynamic cash flow and with current market conditions, more early-stage startups could see less consistency month-over-month as customers push off buying decisions, even if their overall trajectory is moving in the right direction. This can make it harder to plan growth initiatives or feel confident in deploying enough capital to accelerate growth.  

When you receive revenue-based financing, the funding is based on a percentage of your annual revenue (say, up to 40 percent). Unlike term loans or traditional loans, an RBF provider may offer products that align better with your business cycle, such as repayments based on a percentage of monthly cash receipts or that graduate over time. 

This can ease concerns about payback as in the months that you make more, you pay down more, and in the months where you bring in very little, you pay back very little based on your agreed monthly percentage. Or in the case of a graduated payment, your set payback is smaller in the initial period allowing you to more easily see a return on the capital you deploy. 

Financing like RBF supports scaling your business in uncertain markets when temporary dips in revenue could be likely. You’ll still have the runway available and can deploy capital towards areas that generate more revenue.

#2: Revenue-based Financing is Built to Grow with You

As we’ve mentioned, revenue-based financing is based on your predictable revenue. It is meant to fund activities that have a direct impact on your revenue growth.  

RBF is made for SaaS and Services companies who are looking to fund growth initiatives and should be deployed in ways that see a direct return—i.e. you need to hire to support implementations and turn your CARR to booked revenue.  

When you deploy capital and start to see a return from your new sales hire (as another example), you can gain access to additional growth capital as well. The underwriting is based on the business’ performance and trajectory, which has additional benefits for the Founder—like no personal credit checks or collateral required.  

One caveat is to ensure that the revenue-based financing you receive comes with a long enough payback term to see the return on your investments. You want to avoid being in a hurry to pay back the funding you receive before you can realistically deploy it towards your growth initiatives. Thinking this way can help to mitigate pitfalls in your capital strategy. 

Revenue-based financing gives you the freedom to invest in the opportunities you think are most likely to help you grow toward your vision. 

#3: Revenue-based Financing Plays Well with Existing Equity

If you’ve previously fundraised during the record-breaking investments of the past several years—you may be skeptical about exploring new funding options, but revenue-based financing is worth considering in this new market.  

Valuations are lower than they used to be, so the equity to investment ratio has shifted, and you will receive less cash in hand in exchange for your equity. Unlike VC funding, RBF is non-dilutive—meaning you’re maintaining your equity stake and not diluting current investors further. 

With an alternative funding option like revenue-based financing, you get the capital you need to grow and maintain the control over the business that you currently have. The process is also much faster than an equity raise, which allows you to focus on the growth of the business. 

Deploy the capital you take in a way that accelerates your returns, and it’s likely you could be looking at a higher valuation than if you had never leveraged RBF. 

BONUS: If you’re a woman- or minority- owned company, a non-dilutive option won’t jeopardize the grants or contracts that you qualify for as a result of that status. This allows you to continue to tap into all programs that were designed to accelerate you forward.

Revenue-based Financing Empowers Leaders to Enact Their Visions

Funding isn’t as accessible for startups as it once was. But successful Entrepreneurs know there are ebbs and flows in business—and that understanding all paths to growth could mean the difference between success and failure. Revenue-based financing can help to keep your business on track and allow you to operate and invest according to plan. You’re not doomed by the current market. 

Your company has thrived on the strength of your vision. As a non-dilutive, stable source of funding, revenue-based financing keeps the power in your hands to see that vision through—no matter the climate.

To learn more, visit our Growth Center.

 

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