Revenue Based Financing

What Is Revenue-Based Financing?

Revenue-Based Financing (RBF) inputs capital into a business based on its future revenues. As the business generates future revenue, a percentage of the top-line revenue (usually between 3-8%) is remitted. Once the payments have totaled the principle plus an agreed upon multiple (otherwise known as a “cap”), the loan has been repaid.

How It Works

To best explain the process of an RBF loan, let’s use an example.  Start-up company Acme Inc needs funding to grow. GSD Capital loans $200,000 to Acme Inc, taking no ownership in the company. The funding agreement outlines the details of how the loan will be repaid, and sets a “cap”, or a point at which the loan has been repaid. Acme Inc uses the additional funding to implement its growth initiatives and increases revenue. Each month Acme Inc reviews the revenue and sends the agreed upon percentage to GSD. If Acme experiences a rough patch, GSD shares in the downside. Monthly payments stop once the “cap” is reached and the loan is repaid.

How RBF Compares

Revenue-Based Financing Equity Financing
Angels and VCs
Equity Dilution No Yes
Personal Guarantees No Sometimes
Fixed Payment Amounts No No
Valuation of Company Required No Yes
Loss of Control No Yes, to what extent varies
Alignment of Interests Always aligned with revenue growth Can be misaligned regarding growth and exit
Large Market Opportunity Required No Yes
Borrowing Costs Tax Deductible Yes No
Cost of Capital 1 – 1.5x principal in 4 years Targeted 10x return in 5 years
Time to Fund 30 days 3-6+ months
Legal & Closing Costs ~2% $15,000 – $25,000+
Corp Structure Very Flexible Will require C-corp conversion

Scenarios Where RBF Works Well

  • Recurring revenue models such as SaaS and subscription services
  • Growth capital used to improve valuation for a future VC round
  • Capital efficient business with high margins
  • Niche opportunity – great business but won’t attract VC funding
  • Compliment equity fundraising to lower cost of capital

Initiatives We Like To Fund using RBF

  • Finance customer acquisition costs
  • Expansion of sales and marketing efforts
  • Lower inventory costs via ordering of larger quantities
  • Geographic expansion

Learn More

Revenue-Based Financing FAQ