Revenue Based Financing (RBF) is a corporate finance product (as opposed to project finance) used to assist business growth. RBF provides debt capital to a business in exchange for a share of revenue for either a fixed term or until a cap is met. Borrowers often make monthly payments based on a proportion of gross cash receipts.
I connected with Dimitry Gershenson, CEO and Co-Founder of Enduring Planet, to dive deeper into RBF, when startups should consider RBF, and what startups should consider when looking at RBF.
When should startups consider RBF?
A startup might look at RBF in 3 scenarios:
– If actively raising a venture round and trying to minimize dilution.
– In between rounds, as a means of increasing growth and thus getting a higher valuation later.
– Outside of the VC dynamic, for funding to support demand/growth.Generally, RBF is used to directly impact near-term revenue (sales, marketing, BD, etc.) but can be used by early-stage companies to purchase inventory, invest in new equipment, etc.
What are the benefits of RBF?
RBF, compared to other financings, is:
– Entirely Non-Dilutive: Typically RBF loans do NOT include any dilutive provisions (warrants, etc.)
– (Typically) Unsecured: RBF loans generally do not require collateral or personal guarantees, and don’t include other complex forms of security or complex covenants (like traditional collateralized loans).
– Faster: With Enduring Planet, founders can receive term sheets within a week and investment in as little as 30 days. These timelines vary by lender but are generally much faster than other forms of business debt/credit.
– Streamlined: The legal documents and the underwriting process are simpler, making it easier on founders (less time spent in diligence) and reducing the overall cost of raising (lower legal fees).
– Flexible: Payments are directly related to topline revenue, meaning that a company pays less during a bad month.
Who is eligible?
Eligibility varies depending on the lender, but common criteria lenders pay attention to include:- Consistent + growing revenue
– Strong gross margins
– RunwayRBF is generally limited to post-revenue companies with healthy gross margins (> 30%).
What is the process for a startup to apply for RBF?
The process varies depending on the lender, but generally, lenders will ask for financial documentation and access to banking (and sometimes accounting/commerce platforms as well) before receiving a term sheet, if eligible. If the financier uses automation in their underwriting, the whole process should take a few weeks. Otherwise, it can take up to 2 months – and in this case, businesses should be mindful of how much time this can take compared to the amount of runway they will receive.
When talking to RBF providers, what should a startup pay attention to?
The question every startup should be trying to figure out is: how is the lender projecting future revenue and how does that compare to internal projections? To answer this question, there is nothing to lose, but everything to gain by asking the lender for their model, such that one can understand the lender’s assumptions, business performance expectations, and IRR.
Other than assessing a lender’s model, below are questions businesses should ask of their prospective lender:
– How long does the process take to receive a term sheet?
– What other value is provided, outside of capital (network, operations support, etc.)?
– Is there mission/vision alignment?
– Are there easy buy-out provisions or refinancing provisions?
– Is there a cap on repayments or a term on the RBF, or both?
– What is the fee structure (origination, legal, etc.)? Is the fee structure transparent?
– What is the effective cost of capital? What is this based on?
– Is there downside protection for lender?
Who is providing RBF?
RBF lenders include Lighter Capital, Decathlon Capital, and Calm Capital Fund.
One thing to note is that while Pipe looks similar to RBF, Pipe is actually a different product, Factoring. Unlike RBF, which provides debt against revenue, Factoring entails pre-buying contracts. The risk involved in this is that if a contract is cancelled, the borrower is expected to replace it with another contract (or multiple contracts) of equal value.
