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What is Revenue Based Financing?

In order to be able to grow and take advantage of market opportunities, businesses often need access to financing. However, most businesses lack the track record, asset base and stability that would give them easy access to funding. This is particularly true in the case of eCommerce businesses who need appropriate financing to take advantage of the fast moving markets they operate on.

 

Since the 1970s and the emergence of Venture Capital, there has been little to no innovation in the field of business funding. This means that the traditional ways of raising money are not adapted to the growing shift towards eCommerce that started in the 2000s. Where brick-and-mortar shops had slow moving inventories, exclusive access to products and a visible physical presence to attract customers, eCommerce need to invest heavily in advertising and fast moving stocks to be able to sell as much as possible whilst customer attention is on them.

 

To face these high upfront costs requires fast and flexible access to money, and a new way of funding eCommerce is currently emerging to respond to these requirements: Revenue Based Financing.

 

Revenue Based Financing (RBF) is a method of raising capital for high growth businesses, in which the investor makes a cash advance in exchange for a fixed share of future monthly revenues. As such, monthly payments match your revenue cycle and increase and decrease following the seasonality of your business.

 

How it works?

The process is simple:

 

  1. You apply to a Revenue Based Financing provider (such as Scaleity). After assessing your eCommerce with analytics, if you qualify, you will receive money to spend on advertising and inventory.
  2. Each month, you pay the RBF provider a pre-agreed percentage of your revenue. There is no fixed term. Payments are made on a monthly basis until the full funding amount has been bought out, plus a fixed percentage fee on the funds you get. The fee generally ranges from 5% to 12%.

 

For example:

 

  • You obtained Revenue Based Financing of €30,000 with a percentage payment of 10% and a 6% fee
  • You will have to pay the RBF provider a total of €30,000 + €30,000 x 6% = €33,600
  • In the first month, your revenue is €120,000, you pay €12,000 (= €120,000 x 10%)
  • In the second month, your revenue is €96,000, you pay €9,600 (=€96,000 x 10%)
  • In the third month, your revenue is €120,000, you pay €12,000 (= €120,000 x 10%)

 

Additional Benefits:

On top of being flexible, Revenue Based Financing also has additional advantages that make it an attractive value proposition for eCommerce.

 

First, it is fast: the entire application process with most RBF providers is done online and the assessment only takes a few hours. You can expect funds on your bank account within a couple of days.

 

Second, it is founder friendly: RBF providers do not take collaterals or personal guarantees. In addition, there is no dilution of the owners’ equity that happens when you bring an external investor in exchange for shares in your business. With Revenue Based Financing, you stay in full control of your business and don’t have to share future profits.

 

Third, it is low-risk: you don’t have to worry about meeting the fixed repayment of a bank loan. With Revenue Based Financing, you only pay pro rata to your sales. If your activity slows down, you will pay less.

 

To Sum Up:

Revenue Based Financing is the solution to eCommerce cash issues, with a fast, flexible and founder-friendly means of getting funds to accelerate their growth.

 

If you would like to further discuss how to grow your business with Revenue Based Financing, send us an email to hello@scaleity.com. We will be happy to look at what we can do for you.