How revenue-based business loans work for SMBs

Not well known or used by European entrepreneurs, revenue-based loans — also known as revenue-based financing — offer an interesting alternative to traditional financing solutions.  Based on the anticipation and projection of future revenue, they let promising companies finance tomorrow’s growth today. 

But because this financing instrument is not widely offered by banks or traditional lending institutions, it’s easily overlooked. 

In this article, we explore how revenue-based business loans work, their costs and benefits, when they’re most useful, and alternative solutions.

What is revenue-based financing?

Particularly suited to companies in the digital sector, this type of short-term financing gives you an advance on your recurring revenues in order to cover your costs. Unlike traditional loans, revenue-based loans are based on a company's current or future revenues rather than its balance sheet, and don’t require collateral or assets up front. 

In return, lenders receive a percentage of the company's turnover until the amount of finance granted — plus any interest agreed in advance — has been paid.

This option is fast and flexible, while preserving your capital and facilitating growth. It’s also non-dilutive — you’re offering a share of a defined portion of revenue, but not a lasting stake in your company. 

Most importantly, this financing provides the cash you need now. You don’t have to wait for monthly collections from your customers, and you can recoup your investment quickly. 

Particularly for tech companies and those with long sales or payment cycles, this is a way to finance growth in the short term. 

How do revenue-based loans work?

Revenue-based financing relies on modern technology. In short, you connect your accounting and finance tools to a scoring platform which evaluates your company's performance and future revenues. 

This connection lets you provide real-time updates as revenue comes in, and therefore gives the required share to the lender.

This type of loan is best suited to SMBs that are already digitally savvy. To assess the company's creditworthiness, the lender requires real-time access to certain management data about the borrowing company.

As a reminder, this type of financing is non-dilutive — you don’t sell any shares or pay long-term remuneration to investors (beyond the initial agreement). It is also quicker and easier to obtain than bank loans and requires no counter-guarantee.

Revenue-based loans are short term (1 to 12 months) and can be disbursed more quickly than a conventional loan — usually in a few days or weeks. Some lenders let you complete all the formalities online and receive a reply within 48 hours.

Repayments can be made on a straight-line basis, like a traditional bank loan, or in monthly installments that vary according to turnover, thereby supporting businesses with irregular revenues. The lender is paid a fixed commission based on the total amount financed and the repayment period.

Why use revenue-based financing?

Revenue-based loans aren’t a good fit for every business, or even for the majority. But in the cases where it makes sense, there are some significant benefits. 

• Finances short-term growth. RBF is a short-term financing solution that encourages business growth and development. It lets you quickly obtain additional funds for your one-off needs without stifling growth elsewhere.
• Good funding for asset-poor companies. Banks often favor the financing of tangible assets (premises, machinery), because these provide collateral. And while other options like inventory-based financing can make sense for companies with lots of physical assets, RBF lets you finance intangible assets such as customer acquisition, marketing, recruitment or product development.  Digital companies (like software or SaaS products) may be in exactly this position. 
• Relies on data-driven decision making. One of the main advantages is that financiers base their analyses on the company's current figures, rather than past balance sheets. By connecting your management tools, you can:some text
  • Have access to the latest financial results and forecasts 
  • Adjust your financing as closely as possible to these figures
  • Tailor your repayments to your company's performance and reduce your financial risk.
• Offers very fast financing. Obtaining a bank loan can be a long and complex process, whereas RBF is much quicker. Funds can arrive within 48 hours.

By choosing this option, you can achieve more predictable cash flow while retaining control of your business.

Steps in the funding process

Applying for and receiving a revenue-based loan usually requires the following steps. 

Step 1: the financing application

Naturally, the first step is the application. This includes information crucial to assessing the company: its business model, current revenues, growth history and short- and long-term financial projections.

This assessment may also include an analysis of the company's financial health, and past growth and future projections.

All of which can be a lot. But digital-first companies will be able to connect their finance tools, so much of the application will be automated.

Step 2: Demand assessment

The RBF team analyzes your company's performance in real time. In order for the loan to be approved, you must provide access to the essential data needed to assess your organization's financial health, performance and growth potential:

• Bank data via open banking, which has become compulsory for banks and allows a third party to access the company's bank statements, with the company's agreement. This enables a better estimate of your future income;
• Financial data from point-of-sale software, payment solutions, invoicing tools or financial management systems;
• Traffic data from your company's website via audience measurement tools — especially if you hope to fund growth marketing efforts;
• Transactional data from your e-commerce site, marketplace, customer relationship management (CRM) tool or reservation system. This may include your churn rate (customer turnover), customer acquisition rate, average length of the sales cycle, and more;
• Data from online advertising networks (such as Google Ads, Facebook Ads, etc.).

In practice, access to most of this data is given at the time of the loan application, usually via a step-by-step process. So while it feels like a lot, it may not take too much effort. 

Step 3: the offer

If your company meets the criteria, the lender will provide a finance offer detailing:

• The amount of finance
• The repayment terms and duration
• The interest rate, generally between 4% and 10%
• (If applicable) the amount of the fixed commission

If you accept the offer, the funds are transferred to your company's accounts with little or no delay.

Step 4: Repayment

Once the offer has been accepted and the funds received, you start repaying the loan according to the agreed terms.

A significant advantage is that the level of repayment can be adjusted according to your company's performance. As the lender has access to your data, it can adjust its deductions according to the income received.

Step 5: the possibility of repeating the operation

Another advantage of the revenue-based financing model is that it can be repeated. Once the initial analysis has been carried out by the lenders and the business model has been understood, the company can access finance much more quickly. 

Many companies use recurring credit as a way to spur growth campaigns. Whenever they have a key campaign or big announcement planned, they use RBF to provide the extra capital they need to cover it. 

A smart complement to traditional financing

Revenue-based loans complement traditional financing methods such as venture capital (equity fundraising) and bank debt:

• Equity-driven: Venture capital funds enable hyper-growth in exchange for rights to equity.
• Asset-driven: Bank debt requires assets as collateral and is difficult to obtain for digital companies.
• Data-driven: RBF uses the data generated by companies to finance their acquisition campaigns and inventories, and to convert their recurring revenues into immediate cash flow.

Revenue-based financing is therefore best used as a growth accelerator for businesses. It frees up cash for discreet growth initiatives, but doesn’t eat into your overall funding pool. 

Of course, revenue-based financing isn’t a good fit for every business. There are quick and easy alternatives that can meet your needs just as well, if not better.

Invoice financing with Defacto

Whether or not you pursue revenue-based loans, invoice financing may be an even faster and more flexible source of funds. Defacto offers a faster and less restrictive alternative to RBF, allowing you to obtain financing on your terms. You have two options for invoice financing: 

• Receivables: You select the customer invoices you wish to raise funds against. Get the cash to use today, rather than waiting until the end of the payment cycle. 
• Payables: Pay your supplier invoices early without using your company’s savings. We pay the invoice today, and you pay us back later.

Defacto also connects to your finance tools, and you can receive your loan offer in as little as 27 seconds! We use algorithms that set an initial credit limit based on the information provided, and then adjust the limit dynamically as the business grows or proves its reliability. 

It’s easy to repay as you like, and you’ll be hard pressed to find better interest rates. If you need fast, flexible access to working capital, Defacto is worth a close look. Find out if you’re eligible here.