Deep dive: Revenue Based Financing

Revenue-based financing (RBF) has emerged as an alternative for companies seeking capital without the drawbacks of traditional funding methods like venture capital or traditional bank loans. In this interview, we sat down with Boris Redfern to explore the mechanics of revenue-based financing and discuss its advantages for both founders and investors.

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Mechanics of Revenue-Based Financing

‍Revenue-based financing allows companies, particularly those with subscription-based models, to leverage their projected future revenues for upfront cash. For example, a subscription-based company could trade a portion of its next 12 months' projected revenue for immediate capital. Investors receive a discounted rate on the future revenue and are repaid over the next 12 months at a fixed discount rate.

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‍Advantages for Founders:

‍No dilution: One of the significant advantages of RBF for founders is the absence of equity dilution. This is crucial for those who believe in the immense potential of their business.

Fast access to capital: RBF provides a quick and efficient alternative to the often arduous process of dealing with traditional financial institutions or non bank lenders.

Accessible for tech SMEs: Particularly beneficial for tech SMEs that may be deemed unbankable due to their unique business models or curtailed track records.

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‍Disadvantages for Founders:

‍Ticket size: The ceiling on the amount borrowed may be a disadvantage for companies looking to secure substantial capital. With revenue based financing, companies can get up to 45%* of ARR upfront.^‍
_{*usually capped at 30% for the initial transaction}

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‍Advantages for Investors:

‍Stable and fixed Income stream: Investors benefit from a predictable and stable income stream over a 12-month period, making it an attractive option for private credit portfolios.

Reduced risk: Investors are strongly protected from the volatility associated with equity investments, as their return is fixed and secured against the company's future revenues.

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‍Disadvantages for Investors:

‍No equity ownership: Unlike venture capital, RBF does not offer ownership stakes in the underlying business.

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‍Risk Management and Due Diligence

‍Levenue uses proprietary technology to gain an in-depth understanding of a company's financial health. Through API connections with accounting software, payment providers, and banking information, Levenue maintains real-time transparency and actively monitors transactions for potential defaults. Ultimately making revenue-based financing a flexible and efficient funding solution, particularly for tech SMEs facing challenges with traditional financing methods.