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What is revenue-based financing and how do you set it up?
Temps de lecture : 5 minutes
Want to scale your business with revenue-based financing? Find out what it is and how to set it up.
Sommaire
It is common practice to resort to bank loans or fund-raising when a company needs to optimize cash flow . However, the cumbersome nature of these two financing methods means that they cannot meet the specific needs of certain types of digital company. Revenue based financing, an innovative and fast financing method.
We tell you all about it in this article.
Revenue based financing : definition
Revenue-based financing is a concept imported from the United States. a financing model specifically designed for companies operating on the Internet . Translated into French, Revenue based financing means "Financing based on your sales forecasts". Also known as Royalty Based Financing.
In other words, WCR is like a cash advance. The company then has immediate access to a certain amount of cash, without having to wait for customer payments.
Appreciated for its speed and flexibility, revenue-based financing is emerging as an alternative source of financing to debt and fund-raising.
In fact, finance providers need only consult and analyze your data to forecast your future income and grant you the right financing. In just a few hours, you'll have the cash you need. In other words, RBF is a way of converting projected sales into immediate cash flow.
RBF is aimed at companies that meet the following criteria:
Doing business online
Generate recurring income.
How does it work?
In concrete terms, this is how revenue-based financing works:
The funder asks about your activities and your financial performance by logging on to your online tools. He will then request access to any interface that provides him with all the information he needs to assess your future sales (and therefore your ability to repay him):
Google Accounts
Bank accounts
Advertising accounts
E-commerce platform
Etc.
However, you must remain vigilant about the funder's data processing policy. You are giving them access to your sensitive data. You must therefore ensure that this data is not disclosed to third parties.
If he feels that your financial health reassures him about your ability to repay, it confirms your eligibility for financing. He then proposes an amount adapted to your sales and releases the funds within 72 hours.
Please note that it does not monetize 100% of your foreseeable sales. You are allowed a certain margin. So if your actual sales are lower than expected, you won't be in trouble.
You reimburse . The advantage of FBR lies in the flexibility of the repayment terms. In a bank loan system, for example, the repayment schedule (instalments and monthly payments) is fixed, regardless of the ups and downs of your business, but this is not the case with FBR. This is not the case with FBR repayments, which are fully adapted to the seasonality of your income. The amount of your monthly repayments therefore depends on your monthly performance.
On the other hand, the company levies a commission ranging from 6 to 9% of the amount advanced.
What types of income allow you to turn your future income into immediate cash?
Two types of income can be affected by WCR:
SaaS
SaaS revenues meet the two criteria necessary to qualify for Revenue Based Financing. These are recurring revenues generated from online activities. The financer will use two indicators in particular to assess the company's ability to repay:
Le MRR (Monthly Recurring Revenue). This is the most important indicator for subscription-based businesses such as SaaS software publishers.
L’ARR (Annual recurring revenue) whose calculation is based on the MRR. It forecasts the company's annual revenues.
E-commerce
The case of e-commerce companies differs somewhat from that of SaaS companies. Here, we can't talk about recurring revenue. On the other hand, past revenues and sales curves are invaluable in forecasting future revenues.
An RBF enables an e-commerce company to transform its monthly cash flow into annual cash flow, providing liquidity to finance growth.
What are the benefits of RBF?
Particularly well suited to the needs of digital start-ups, RBF offers a number of advantages.
Fast financing
With RBF, there's no need for cumbersome paperwork or wasted energy. FBR is a simple but effective method of financing to obtain funds quickly to replenish its cash flow.
A non-dilutive financing method
Unlike fund-raising, where other shareholders gain access to the company's capital, RBF lets you keeps you in control of your structure .
Flexible, adaptable financing
As we mentioned earlier, the repayment method in an FBR is completely different from that in a conventional FBR. adapted to the company's performance. Monthly payments are calculated on the basis of sales. This means they are not fixed, as is the case with a bank loan.
The monthly payment is fixed as a percentage of sales . No matter how long it takes. Repayment terms can be adapted to suit your company's constraints.
On the other hand, debt capacity also evolves according to your performance. If your sales increase, so does your debt capacity. As a result, the amount of financing will increase accordingly, while the procedure for obtaining it will remain just as simplified.
RBF: a financing method that promotes equal opportunities
The financier takes no account of the investor's person or assets. All that matters is the investor's sales figures, and therefore his or her ability to repay the loan. RBF thus gives the chance to benefit from financing if you've got good ideas. Gone is the cliché that only the rich have access to financing!
Inexpensive financing
Interest rates on an FBR are much the same as for a bank loan. Depending on the company's profile, the financier charges a commission ranging from 6 to 9%.
What are the disadvantages?
RBF also has its drawbacks.
The intrusive nature of the process
A company wishing to benefit from RBF must open your data to the financier . It then has access to :
Your bank details
Vos comptes marketing
Your e-commerce accounts
In short, a whole range of highly sensitive information.
However, this disadvantage can be overcome by taking care to choose a funder with a rigorous approach to data processing.
Short repayment terms
By its very nature, the RBF is a short-term loan. Repayment terms are generally as follows between 6 and 24 months . What's more, the repayment amount depends on sales, so if your sales increase, so do your monthly repayments.
However, all you need to do is find a good compromise in setting the percentage of monthly payments to prevent the repayment from affecting your performance.
How can Hero help you with revenue-based financing?
Hero is a payment solution specially designed for professionals . It's a flexible solution tailored to the needs of very small businesses. It offers payment facilities in the form of deferred or split payments, enabling you to offer your customers order now and pay later . However, to avoid any gap in your cash flow as a result of this practice, the platform immediately advances you the amount of your sales.
We have seen that revenue-based financing is similar to cash advance which ensures that digital businesses don't suffer from problems in this area. Hero's operating mechanism enables small and medium-sized businesses to receive D+1 customer collections and benefit from sufficient liquidity to replenish its cash position.
The reverse process also allows you to buy via the ad platform and pay on D+60, while benefiting from payment facilities.
The main advantages of RBF are speed and flexibility.
Request a customized quote
In conclusion, the Revenue based financing Hero is an alternative form of financing that is ideal for small businesses wishing to obtain financing quickly and on a one-off basis, provided that they operate online and generate recurring revenues via the Internet. With Hero, you can also benefit from fast, flexible financing to replenish your cash flow.
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