Revenue-based financing

What is revenue-based financing?

Revenue-based financing, often shortened to RBF, is a way to borrow against future sales. A provider advances a sum of money. The startup repays it by giving up a fixed share of its revenue each month, until the total repaid reaches an agreed amount that is higher than the sum advanced.

The key point is that repayment moves with the business. In a strong month the startup pays more, in a weak month it pays less. There is no fixed instalment and no equity given away. This makes it different from a normal loan, where the instalment is the same whatever happens to sales.

How does the repayment work?

The agreement sets three things: the advance, the share of revenue to be paid back each month, and the total to be repaid. The total is a fixed multiple of the advance, commonly a little above one times, so the lender's return is the difference. The cost is therefore fixed in rupees, even though the time to repay varies.

Because the cost is fixed, a business that repays quickly pays a higher annual rate than one that repays slowly. That is a point many founders miss. Ask the provider to show the effective annual cost under fast, medium and slow repayment, and compare it with other options.

Which businesses suit it?

It suits companies with steady, measurable revenue and healthy margins: software subscriptions, online brands that sell direct to consumers, marketplaces and apps with payments data the provider can read. Providers want to see monthly revenue flowing through accessible accounts, such as payment gateways, bank accounts or advertising platforms.

It suits spending that pays back fast, such as digital advertising or inventory, where each rupee spent brings back more than a rupee in a few months. It does not suit a company that is still searching for a product or that has weak margins, because the repayments would eat the cash the company needs to survive.

How do providers decide how much to lend?

Most providers look at several months of revenue, how stable it is, the margins, the refund rate and how many customers come back. They often connect directly to your payment and accounting systems to verify these numbers. An advance is commonly set as a share of monthly or annual revenue, so a larger business can borrow more.

Some providers also look at how you plan to use the money. Spending on marketing with a proven return is easier to approve than spending on rent or salaries. Be ready to show the expected return on each rupee of spend, using real past data.

Who offers it in India?

A number of fintech platforms offer revenue-based financing to Indian startups and small online businesses. GetVantage, Klub and Velocity are among the names that have worked in this space. Some are registered non-banking finance companies (NBFCs), some work with NBFC partners, and some structure deals through alternative investment funds.

The legal structure matters to the borrower. It may be a loan, a purchase of future receivables or a debenture, and the rules, taxes and rights differ. Read which one applies to you. The market is still young and products change from year to year.

They are close cousins. A merchant cash advance gives a business cash and takes repayment from daily card or digital payments. Revenue-based financing is the term more common among online and subscription businesses, where the provider reads data from payment gateways, accounting tools and advertising accounts.

The common feature is that repayment follows sales. The details differ by provider, so compare contracts and not labels.

Neither should be confused with a bank overdraft, which has a limit and a rate set by the bank and can be drawn and repaid at will.

How does it compare with venture debt and equity?

Compared with equity, revenue-based financing costs the company no ownership and no board seat. But it must be repaid, and the cost can be high. Compared with venture debt, it needs no venture capital backing in most cases, is faster to arrange and is smaller in size, but the instalments depend on sales instead of a fixed schedule.

Venture debt is aimed at companies with investors behind them and often comes with warrants. RBF is aimed at companies with revenue and often has no warrants. Many startups use the two at different stages: RBF for small growth spending, venture debt for larger needs, and equity for the bets that cannot be financed by revenue.

What are the risks?

The main risk is that repayments reduce cash every month, and if the share is large it can slow the business. A company that borrows to run ads and sees the ads stop working can be left repaying money that did not produce growth.

Other risks are the effective cost, covenants about keeping revenue flowing through certain accounts, limits on changing payment providers, and the risk that taking several advances at once makes the combined repayment too big. Read the contract for what happens if revenue falls to zero, or the business is sold.

There is also the question of what the lender can do if you stop paying. Some providers have little recourse beyond reporting the default, while others hold security or a personal guarantee from the founders. Find out which kind you are signing.

What should a founder check?

Ask for the full cost in rupees and as an annual rate. Check the share of revenue you will pay and how it is calculated: gross sales, net sales or collected cash. Check what happens if you want to repay early, whether there is a fee, and whether the lender needs a personal guarantee. Check the data access you must give.

This guide is general information. Terms and the legal form vary by provider and change often, so please check with a lawyer or chartered accountant before signing.

Put each offer in the same table: amount advanced, total to repay, share of revenue, fees, early repayment terms, security and personal guarantees. Then run your own forecast through each one: what you would pay in a good, normal and bad year, and how long it would take to clear.

Also compare with other sources of money, such as a bank working-capital limit, venture debt or a small equity round. The cheapest headline is not always the lowest cost once fees and speed of repayment are counted.

What is the tax and legal side?

Because the legal form varies, so does the treatment. If the deal is a loan, the cost is interest and may be deductible under the usual rules, with tax deducted at source applying in some cases. If it is a purchase of receivables, the accounting is different. The provider may be an NBFC regulated by the RBI, which must follow rules on fair practices and disclosure of the cost to the borrower.

Ask the provider to state its regulator and the exact legal form in writing. A small business should also get an adviser to read the clause on early repayment and on what happens if payments stop.

Read next

• What is venture debt? How Indian startups borrow
• Bootstrapping vs raising money
• Startup funding stages explained, from pre-seed to IPO