Also known as “RBF”, “revenue loan”, “royalty-based financing”, “royalty financing”, and “revenue-based funding”, this is a type of loan that is repaid through a percentage of the borrower’s monthly revenue. Typical loan repayments are a fixed amount that both the lender and borrower agree upon prior to financing.
This makes RBF unique because payments vary, depending on how much revenue was generated on a specific month. Simply put, high revenue means a higher repayment amount.
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How Does RBF Work?
It’s usually structured as a term loan, so the borrower doesn’t get the full amount upfront. Rather, the amount can be doled out over a given time period—typically over multiple years, depending on how much of the fund is needed during specific periods. This is done so that the borrower can avoid paying interest when the fund isn’t actually needed.
Repayments, which include the principal and interest, can either be based on the previous quarter or month’s revenue (cash receipts percentage) or a fixed revenue—still dependent on your agreement with the RBF lender.
Once any of the milestones below have been reached, the loan obligation and repayments can end:
· The lender receives a pre-determined multiple of the original loan.
· The loan reaches the terminal date.
· The lender achieves a pre-determined internal rate of return (IRR).
How is RBF Different from Traditional Debt and MRR Financing?
Revenue based financing firms can usually provide larger loan amounts compared to banks. RBFs also set fewer limiting covenants. On the flip side, though, RBF loans are more expensive compared to traditional debt.
The loan facility known as “MRR line of credit” or MRR financing sets a limited amount that a business owner can borrow, which is based on how much their monthly recurring revenue (MRR) is.
For SaaS companies that operate on a subscription-based model, the asset that MRR financing lenders consider is their sticky revenue. Ultimately, this becomes the loan’s collateral base.
How Does RBF Compare to Venture Capital and Other Types of Equity Investments?
The key difference is defined in one word: “non-dilutive”. Business owners that receive capital through RBF can retain control and ownership over their organization. RBF lenders do not occupy board seats and they’re usually not interested in directly participating in the company’s operations.
There’s more freedom for CEOs or founders to implement their vision and manage their business the way they see fit.
Does RBF Suit Your Business?
You may already be seriously considering revenue-based financing as a funding source. Before you take the plunge, though, it’s important to ask yourself the following questions:
1. What is your monthly recurring revenue?
2. In terms of EBITDA, does your organization have a positive cash flow?
3. How modest are your current debt obligations?
4. Are your historical and projected growth positive?
One crucial thing to remember in relation to RBF is that it’s only viable for companies that are already generating revenue. If you’re just starting out and have not achieved a positive cash flow, this funding option may not be for you just yet.