Introduction
Operating a small or medium enterprise involves making financing choices with limited time and information at hand. Revenue-based financing is a type of funding that the rise of online payment systems and e-commerce has facilitated. It relies on the basic concept that the company receives funds upfront and repays them as a percentage of revenue until the total amount due is repaid. For an MSME operating through a marketplace, subscription service, and recurring sales, revenue-based financing may be considered by businesses with recurring or predictable revenue patterns, as it links its cost of funds directly to business operations. This article will provide information on the process, providers, costs, and ways to assess it.
Micro, small, and medium enterprises constitute the overwhelming majority of firms worldwide. Revenue-based financing is one instrument responding to this gap, particularly for businesses selling through digital channels.
Revenue-based financing, or Revenue Share Financing or Royalty-Based financing, is a method of financing where a service provider provides capital to the company, and the company repays the provider by giving him/her a certain percentage of the revenue earned from his/her business every month.
The deal works on three parameters:
- The funding – It is the capital provided to the business upfront.
- Revenue share percentage – This is the percentage of the monthly revenue that is paid to the provider. This is usually done in a single-digit or low double-digit range.
- Repayment cap – It is the total amount of money that needs to be paid back after which the deal will be over. It is usually a multiple of the funding.
Since repayment is made from the revenue earned, the duration of the deal is not definite. If the company is growing very fast, then they will repay faster, and vice versa, but the cap on repayment will always be there.
This common process consists of five stages in the digital world:
- Application. The company connects its revenue data, such as bank statements, payment processor data, marketplace payouts, or accounting software.
- Evaluation. The provider analyses sales history, revenue consistency, margins, and growth trends.
- Offer. The provider makes an offer that includes the funding amount, revenue share percentage, repayment cap, and fee.
- Funding. After the contract is signed, payment is made to the company.
- Continuous repayment. Payments are taken continuously as a portion of revenue until the cap is reached.
For example, let us imagine the following situation: A food specialty brand has received USD 50,000 in funding with an 8 percent revenue share and a repayment cap of 1.4x, so the total obligation is USD 70,000. During one good month, the company earns USD 60,000; the payment is USD 4,800. During one bad month when the company earns only USD 30,000, the payment is USD 2,400. The obligation ends once the total reaches USD 70,000.
Who Provides Revenue-Based Financing
There are several types of providers who can implement this business model:
- Specialists in RBF funds and platforms – those providers that are oriented specifically on revenue-based business funding structures, usually related to recurring revenue streams.
- FinTech lenders – online providers that assess the creditworthiness of small businesses based on transaction and settlement information.
- Embedded finance providers – providers that incorporate financing into the existing software platforms of MSMEs, for example, e-commerce, marketplaces, and payment systems.
- Providers that utilize royalty structure funds – funds which treat revenue share as an asset class and are commonly used in markets where digital lending to MSMEs has become developed.
The differences among these types of providers in the case of MSMEs can be reflected in the way they obtain revenue information, non-revenue-based fees, and repayment calculations across various channels.
Common Use Cases of Revenue-Based Financing Across MSME Sectors
The method is commonly used by organizations with predictable revenue patterns:
- Stock purchases prior to the peak period when revenue will be needed for fulfillment of orders for consumer goods.
- Marketing and acquisition expenses, where money invested yields results, from which repayments are then generated.
- Money for working capital to process an order without having to wait for receipts.
- Investment in development of a product or a new geographic market.
- Smoothing of cash flow in subscription businesses where revenues are predictable.
From a sectoral standpoint, the model has been used extensively by e-commerce companies, subscription software companies, digital services providers, and lately even by food and logistics providers with digitized sales. The common factor between all these sectors isn’t size but predictability of revenues.
What Revenue-Based Financing Costs and How to Evaluate an Offer
In the absence of an interest rate in the conventional sense, the price is determined by the repayment cap and accompanying fees. A cap of 1.4x on a USD 50,000 investment results in USD 70,000 to be repaid; thus, the amount remaining after subtraction is the financing cost. The time at which this cap is attained varies with the level of revenue performance.
The list of critical items for review when assessing an offer is not long:
- What does “revenue” mean? Gross income? Income less refunds, taxes, and processing fees?
- What is included and excluded in the cap? Origination, platform, or servicing fees are additional charges.
- Is there a minimum monthly repayment amount? A floor payment creates some inflexibility.
- Reporting requirements – what is the reporting frequency, and what is the reporting medium?
- Early repayment terms – whether making payments beyond the cap before the set period incurs a fee.
Two offers with the same headline cap can behave differently if their revenue definitions or fee structures differ. Reading the agreement line by line, and asking the provider to clarify anything ambiguous in writing, is a reasonable step before committing.
How Providers Evaluate Eligibility for Revenue-Based Financing
The assessment is based on the health of the revenue itself. The providers usually examine:
- Revenue track record – several consecutive months of verifiable sales history.
- Consistency of revenue – stability from month to month, because unstable sales will make predicting the ability to repay more difficult.
- Gross margins – whether the company can keep enough from each sale after paying for the costs in order to support revenue sharing.
- Channel mix – distribution of revenue among the channels, products, and clients.
- Financial accounts and settlements – proving that the sales reported by the company indeed correspond to the movement of funds.
A company without any revenue yet or having very seasonal sales will have fewer chances, as the system requires a stable flow of income. Common preparation steps include maintaining clear records and connected financial accounts.
Frequently asked questions
1. What is revenue-based financing in simple terms?
It is a funding method where a business receives capital upfront and repays it as a fixed percentage of monthly revenue until an agreed total, called the repayment cap, has been paid. Payments go up when sales are strong and down when they are weak.
2. How is the repayment cap determined?
The cap is usually set as a multiple of the funding amount, based on the provider’s assessment of revenue history, stability, and margins. The multiple varies by provider and by the risk profile of the applicant’s revenue.
3. Does revenue-based financing require collateral?
In most arrangements, repayment is secured against the business’s revenue stream rather than physical assets, so asset pledges are generally not part of the structure. Requirements differ by provider and jurisdiction.
4. Which types of MSMEs use revenue-based financing most often?
Businesses with recurring or easily verifiable revenue, such as e-commerce merchants, subscription software companies, and digital service providers, are among the most common users, though the model has spread to other digitised sectors.
5. What happens if my revenue drops during the repayment period?
Payments fall along with revenue, since they are a share of each period’s sales. The repayment cap still stands, but the monthly amount adjusts to what the business earns, which may extend the duration.
Conclusion
Revenue-based financing is one financing structure available to MSMEs. Key factors to consider include repayment mechanisms, revenue share arrangements, eligibility criteria, and applicable terms.
Bettr is a fintech provider under Ant International that provides embedded financing solutions for MSMEs across multiple markets.
This article is intended for informational purposes only and does not constitute legal, financial, investment, or other professional advice, nor does it constitute a recommendation of any product or service. This article should not be regarded as constituting an offer or a solicitation to buy or sell any regulated or financial products or services. It has not been reviewed by any regulatory authority in any jurisdiction. Bettr makes no representations or warranties regarding the accuracy, completeness, or applicability of the content, and readers are encouraged to consult with legal, financial, or other professionals for advice tailored to their specific situation. Bettr does not guarantee the accuracy and completeness of this article and expressly disclaims any and all liability to any person in respect of the consequences of anything done or omitted to be done wholly or partly in reliance on this article.
