Published on 23rd February, 2022
What is revenue-based financing?
Revenue-based financing (RBF) is a form of funding that’s provided to small and medium-sized enterprises (SMEs), where they receive a cash advance in exchange for a percentage of their future revenues. It’s is an alternative to conventional financing such as a bank loan.
Traditional funding options have tedious, lengthy and complex application processes which create a lot of friction and wasted time. Often, it can take weeks or months before a decision is provided and strict requirements have to be met in order to access funding. Usually, this includes evidence of profitability, assets to be used as collateral, along with a detailed credit history dating back several years.
RBF is becoming increasingly popular as it provides SMEs with quick access to flexible funding. For fast-growing businesses funding is required at short notice, for example, to order inventory, hire additional staff or run a marketing campaign. RBF lenders assess historical and projected revenues to determine a company’s eligibility and funding amount. A percentage of a business's future revenue is taken as a monthly fee which typically starts at 5% and repayment periods are between 9-18 months.
A business receives £25,000 in funding and the repayment rate is 10% of monthly revenue:
In month 1, the business makes £50,000 in revenue so they repay £5,000.
In month 2, they make £60,000 so they repay £6,000.
In month 3, they make £45,000 so they repay £4,500.
At the beginning of month 4, they'll have £9,500 outstanding to repay and the total repayment duration will depend on their future revenue.
The example above explains that revenue determines how quickly the funding is repaid. So, during months of higher revenue, the business will repay a larger amount and the repayment period will shorten. Whereas during months of lower revenue, the business will have smaller repayment amounts and the repayment period increases. Essentially, the funding becomes more of a variable cost than a fixed cost, giving the business greater flexibility to deal with dynamic market conditions.
Advantages of RBF for SMEs:
Fast - lenders use existing sales data to offer funding, so decisions can be made in a matter of hours.
Flexible - repayments fluctuate with monthly sales.
Transparent - there are no hidden fees, just a flat rate which is decided upfront so businesses are clear on the total cost of borrowing.
RBF is especially beneficial for seasonal businesses as they’ll be able to order inventory ahead of time. This will help maximise sales volume during peak business periods such as Black Friday and Christmas.
Lenkie partners with platforms to provide an embedded RBF product called Growth Capital:
Receive bespoke pre-qualified offers based on sales data.
Available funding ranges from £10k up to £250k, per business.
Funds can be disbursed within 48 hours.
No interest rate or hidden costs, just a transparent flat fee.
Repayments are a fixed percentage of sales - this improves cash flow management.
Lenkie’s mission is to help small businesses realise their potential by reducing friction around accessing capital.
If you’re interested in finding out more and want to apply for funding click here!