What is the RBF
The "Revenue Based Financing", or "loan based on sales revenue", is an innovative financing model that provides businesses with an alternative source of fresh money, based on their recurring revenues. Unlike traditional loans, RBF does not require collateral or asset transfers. In this type of transaction, an entity lends funds to a company in exchange for repayment from its future revenues, until both the principal funding and the previously defined interest are fully paid off.
Not everything can be financed through an RBF: it is primarily about short-term cash loans. Likewise, it is not about crowdfunding (also known as participative financing), which falls into a completely different category of financial activities. The RBF money is loaned by a debt fund here. Digital companies are more specifically targeted.
How does a RBF operation work
The RBF is a "data-based" process, that is, based on data. The process of a transaction starts with a thorough evaluation of the company by the lending institution. This includes the review of its financial data, revenues and past growth. The fund thus determines the amount of financing it is willing to grant. Once the transaction is concluded, the money is transferred to the company and repayment begins as soon as revenues start to be generated, for a fee.
Concretely, the company requesting financing will create an account on a scoring platform and connect its bank accounts for reading. This will allow the institution to analyze the repayment capacity in relation to cash flow, and not the balance sheet. This step must be carried out with caution: you have to ensure the legitimacy of the platform to avoid disappointments and beware not to sell this data to third parties. Moreover, it is necessary to check that the site indeed belongs to a recognized actor.
In France, Silvr was the first start-up to venture into this niche, backed by leading investment funds (Eurazeo, BPIFrance...) and a fundraising of over 130 million euros. Other entities have set up on the same segment, such as Karmen, Unlimitd or Morino. The RBF principle, although quite recent, is also established in Spain (Ritmo), the United Kingdom (Uncapped) and Ireland (Wayflyer) as well as in the United States (Clearco, born in 2015).
As for interests and fees, Revenue Based Financing is not in principle more expensive than a traditional loan. The request for financing is, in principle, free of charge. The most common model is a fixed billing as a percentage of the borrowed amount.
What is the advantage of RBF over a traditional loan
One of the main advantages of RBF over traditional loans lies in its flexibility and speed. Unlike traditional financing, the analysis is based on data collected live by the platform via access to bank accounts and online stores for e-commerce companies. The fund tracks cash performance to estimate whether the company is able to repay or not. In a traditional loan application, the bank focuses on the analysis of accounting documents: balance sheets, income statements, etc.
A study that does not allow for a live view of cash flows and can only be conducted once a year, or on request in case of an interim balance sheet. The consequence is a quick response, followed by cash in a few days. In the case of bank financing, repayments are made at a fixed maturity. RBF repayment is directly linked to the company's revenues.
This means that payments adjust according to its performance, which allows greater financial flexibility during periods of revenue fluctuation. Similarly, the company can adjust its loans. As the process is based solely on data analysis, the entrepreneur does not have to provide guarantees: the process does not require a joint and several guarantees, any wealth analysis... This financing method also ignores human considerations such as education, experience, network, the extent of assets, and many other more subjective elements that can sometimes come into play.
However, RBF is not intended to finance the company's growth. This financing method is rather oriented towards covering working capital needs. It allows for a quick release of funds to cope with mismatches between money outflows and inflows. But it cannot finance long-term investments.
What are the disadvantages of RBF
The major downside is that the RBF can't finance everything. Additionally, sharing banking information, as sensitive as it may be, is far from insignificant. The financier has the potential to know all about the company's life, all salaries, expenses, activities and revenues... This highlights the importance of strictly dealing with actors that offer a solid data management policy.
Another critical issue: the RBF can be likened to a loan. Therefore, it is mandatory to repay it. However, granted treasury facilities can quickly lead people who don't closely monitor their accounting into a vicious cycle. Constantly financing the need for cash flow through debt without improving the company's profitability can then become a trap that threatens the activity. Resorting to this type of financing demands rigorousness and constant analysis from entrepreneurs so it can be properly utilized.
Why a RBF rather than factoring
Factoring is a process that consists of assigning an account receivable, in other words a customer invoice, to a bank or specialized organization. In exchange, the bank provides money while retaining a commission. It is then to this institution that the customers will make their payment. This has the immediate effect of improving the company's treasury, and disburdening it of the collection. Unlike factoring, which focuses on the financing of customer accounts and receivables via invoices, RBF is oriented towards the company's daily turnover.
This allows applicants to benefit from a greater financing, without being limited by the amount of issued invoices. It also gives a better image to customers, for whom factoring is sometimes perceived as a "seizure" by the bank, and thus synonymous with difficulties. Conversely, factoring does not suppose a repayment, as the bank is responsible for recovering the funds from the company's customers. The operation is thus immediately closed for the company. In contrast, RBF engages the company in a longer process with a repayment imperative.
Revenue Based Financing: an alternative to fundraising?
The Revenue Based Financing is a method of obtaining funds for a company, but this process is entirely different from a fundraising round. Again, this type of loan is intended to finance cash flow expenses within the regular operations of a company (working capital, immediate needs, cash flow misalignments). In contrast, a fundraising round aims to finance long-term investments for the company's development.
If a choice has to be made between these two methods, it should be noted that the difference between fundraising and RBF is similar to the difference between fundraising and a loan. Each of these financing methods matches a specific need. As a reminder, a fundraising round consists of seeking external investors for the company. By providing money to the company in exchange for stakes, they become partial owners of the company and possess all corresponding rights: voting rights, profit distribution rights, etc.
For an entrepreneur, this means a dilution of their ownership, a reduction of their share of profits and imposes new rules such as regularly holding general meetings which can sometimes be complex with third parties. Similarly, investors having voting rights dilute the entrepreneur's power. But fundraising has the benefit of enabling to carry out very significant investments and aiming for much stronger growth.
Furthermore, it strengthens the equity capital. On the other hand, RBF should be considered as a loan intended to finance day-to-day operations. If the goal is not to significantly boost growth or carry out structuring investments, these types of loans remain an appealing choice as they allow the entrepreneur to avoid dilution. One drawback, however, is that they do not improve the company's accounts since the inflow of cash is registered as debt and not as equity, as is the case with fundraising. Another difference: once the application is approved, the implementation of an RBF is much faster and less complicated than a fundraising round, making it an attractive option for companies needing money quickly.
