What is revenue-based financing? Key questions answered

Afshan Qureshi
Afshan Qureshi
Content Marketing Manager
Posted on
March 2, 2022
min read
What is revenue-based financing? Key questions answered

When companies are ready to scale, they often run into the challenge of lacking enough growth capital to adapt to the real-time needs of their market.

Revenue-based financing is a solution that addresses this pain point by providing cash to companies, upfront and on demand. It is a type of financing that provides capital upfront against monthly or annual recurring revenue (MRR or ARR).

As a form of financing, it resolves the bottleneck of not having enough financial capital on-hand to keep funding growth. From this perspective, revenue-based financing is a tool for companies to effectively manage their cash flow, avoid slowing down, and continue to scale responsibly.

If you’re thinking about applying for revenue-based financing, it’s important to know a few basic concepts when considering lending options. We’ve put together some tips to inform your financing journey.

Here are some frequently asked questions, along with some answers:

Table of contents

  • Why haven’t I come across revenue-based financing before?
  • Why revenue-based financing instead of another lending option?
  • How do businesses use revenue-based financing?
  • How does the loan repayment process work?
  • Why choose revenue-based financing instead of another financing option?
  • What is the difference between revenue-based financing and venture debt?
  • How do I get started with revenue-based financing?

Read on to learn the answers.

Why haven’t I come across revenue-based financing before?

Revenue-based financing is a concept that you may be learning about for the first time. So why haven’t you heard about this option from your CFO, advisor, or bank already?

The short answer: you simply may not have come across it yet.

The reason why is straightforward: revenue-based financing is a relatively new type of financial solution. It began growing in popularity with e-commerce and software as a service (SaaS) business models. 

Over the last decade, there has been a boom in the number of recurring revenue-based businesses with predictable MRR (monthly recurring revenue) and ARR (annual recurring revenue) metrics. During the COVID-19 pandemic, many of these digital-first businesses began to experience unprecedented growth due to the rise of online shopping. In times of expansion, companies risk running out of capital.

In response to this economic trend, specialized financing providers like Capchase have designed new products to keep up with the needs of the market. Revenue-based financing providers all have their own unique methodology and approach to creating their solutions.

Different companies may also use different terminology, so it’s not always straightforward to make a direct comparison between revenue-based financing solutions. Companies need to choose the best option for them.

As an example, at Capchase, we have begun using the term programmatic financing to describe our position in the revenue-based financing space. Our team uses a strategic blend of proprietary CapScore™ technology (intended to remove bias from financing decisions), and human attention from skilled underwriters to ensure that our customers receive the support that they need.

What are the best ways to use revenue-based financing?

Founders and executive teams can use revenue-based financing capital across areas of the business. As with other types of business financing solutions, some providers may have compliance-driven requirements for how funds may be spent.

Here are some examples of how Capchase’s customers are using revenue-based financing: 

  • Working capital. FIIT, the highest-rated fitness application on the App Store, relies on high-volume content production to scale up its business. Having experienced a growth rate of 700% in the last 18 months, the company needs reliable access to a large sum of capital as fuel for growth. Here’s a resource that goes deeper into FIIT’s experience with Capchase.
  • Expanding headcount. Blackthorn, a Salesforce app development company, opted to use Capchase since raising venture capital would involve dilution of ownership shares. Because Blackthorn is in its early stages, the company was not eligible for a bank loan. The company needed funds quickly to support recruiting and hiring, so they turned to Capchase.
  • Cutting financing costs. Financing costs have the potential to be expensive — it costs money to borrow money. Nowports, a Series A logistics startup, uses Capchase to help streamline its financial operations and reduce the cost of borrowing. The company uses revenue-based financing and other Capchase products to ensure that funds are in alignment with expansion and other growth initiatives.

Every business is different, so it’s important to consult with your financial advisor before introducing new debt products to your company’s finance stack (finstack). The key is always to make responsible decisions.

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How does the repayment process work with revenue-based financing?

Capchase uses intelligent proprietary CapScore™ software to ensure that borrowers are able to make scheduled repayments. This technology accounts for the schedule that companies need to achieve a business goal. As a result, customers can more effectively manage their working capital and cash on-hand and avoid repayment terms that have the potential to be risky.

Capchase’s software integrates with major banks and accounting services. With this data flow, Capchase can maintain continuous and real-time visibility into the borrower’s financial operations.

In addition to capturing data, Capchase’s underwriting team also performs due diligence to evaluate future revenue objectives. With this picture, Capchase calculates the repayment terms.

With this equation and working capital infrastructure in place, companies gain more control over their cash on-hand.

Why choose revenue-based fundraising instead of another financing option?

There are several reasons why people opt to go with revenue-based financing to access working capital:

  • Fast decisions. The speed of obtaining capital may be faster than other options including — but not limited to — bank loans,  venture capital investment, and venture debt. Companies use established underwriting criteria to determine whether a borrower qualifies for capital, which means that it’s possible to make a decision in 48 hours or less.
  • Non-dilutive. Revenue-based financing is an appealing option for customers because it is non-dilutive: founders, investors, shareholders, and employees do not need to give away company ownership in exchange for obtaining working capital.
  • Manageable repayment terms. Capchase uses intelligent data and software to align repayment plans with forecasted growth objectives.
  • Cost-effective. To maintain financial health, it’s optimal for companies to maintain multiple sources of credit and debt financing. In certain instances, revenue-based financing may be the most cost effective option for balancing working capital constraints.
  • Part of a financial toolkit. Revenue-based financing integrates with a company’s overall financial operation, as part of a bigger picture. For instance, some customers use multiple Capchase products to reduce their capital expenses.

What is the difference between revenue-based financing and venture debt?

Venture debt is a type of debt financing for revenue-based companies. Examples include growth capital, accounts receivable financing, and equipment financing.

These types of financing are available to companies that do not meet the criteria of a bank loan and may require repayments at regular intervals. In this regard, venture debt is more similar to a traditional lending product.

Similar to revenue-based financing, venture debt products are specialized and tailored to specific business use cases. Every lender is different, with their own unique underwriting requirements and terms.

Typically, borrowers use venture debt to extend the capital obtained during the first rounds of financing via venture debt.

How do I get started with revenue based financing?

To get an offer from Capchase, the first step is to register for an account. You can also contact hello@capchase.com for answers to your questions. It may be a good idea to compare options from different lenders.

This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal, or tax advice.