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RBF (revenue-based financing): definition and application

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revenue based financing

An alternative financing model for companies, RBF (or Revenue Based Financing) appeared in the United States in 2015. This solution enables companies to obtain cash in a matter of hours without having to resort to debt. The loan is organized according to sales forecasts and offers significant advantages, while at the same time revolving around key principles you need to know before getting started. Here's a look at what RBF is, how it's defined and how it's used.

What is Revenue Based Financing?

What is RBF? Little-known Revenue Based Financing (RBF) is an alternative financing method to traditional borrowing, enabling a company to benefit rapidly from funds in return for a percentage of future revenues. In this case, RBF enables the investor to share in the company's future success and receive a share of the revenues generated.

In practical terms, future revenues are estimated in advance, taking into account sales and traffic data. They are set out in a financing agreement signed by the company and the investor. The parties agree on a percentage of future revenues to be paid to the investor until a predetermined amount is reached. Once this amount has been reached, the company that has benefited from the funds is no longer obliged to pay money to the funder.

revenue based financing

Open Banking at the heart of the Revenue Based Financing revolution

Open Banking is an initiative that developed in the 2000s, notably thanks to PSD2, the European Union's second Payment Services Directive in 2015. Open Banking enables financial data to be shared securely between several financial institutions. 

This initiative plays a major role in the RBF, as it provides financiers with real-time financial data, which is useful for assessing risk more accurately and thus making a fully informed decision. In addition, Open Banking makes it possible to automate processes and personalize financing offers, while offering optimum data security. All these elements help to make financing more efficient and accessible for companies seeking growth capital.

Debt, capital raising and factoring: the differences with RBF

Understanding what RBF is isn't always straightforward, as the concepts are so varied, from borrowing to factoring to fundraising. Here are a few differences to give you a better idea:

  • Conventional borrowing is time-consuming, energy-intensive and inflexible. RBF, on the other hand, is not based on an amortization schedule, and adapts to changes in the company's sales until the loan is repaid in full, 
  • Fund-raising also takes a lot of time and energy, and you lose some of your capital. RBF allows you to remain operationally and financially independent,
  • Factoring enables companies to convert customer invoices into cash, while RBF enables them to convert forecast sales into cash. However, in factoring, the factor covers the risk by owning the invoice, unlike the RBF financer, who takes no collateral.

Who is RBF for?

This financing model is ideally suited to companies that do not wish to take out a traditional loan with fixed interest and repayment terms. This is particularly the case for start-ups or companies wishing to expand, but hampered by sometimes irregular cash flow. RBF is also of interest to companies who do not have access to traditional loans, or who want to avoid paying high financial charges. 

In all cases, the companies concerned by RBF have an online activity and generate recurring sales, whatever their customers (professional or private). These include digital companies and start-ups.

rbf revenue based financing

What are the advantages and disadvantages of RBF?

RBF is a highly popular solution for many companies seeking financing, thanks to its many advantages:

  • Efficiency. All you have to do is connect your tools and create your account, and you'll receive your financing in no more than 3 days. This saves you time and gives you peace of mind,
  • Non-dilutive. RBF is non-dilutive, i.e. it is a cash advance that unlocks non-dilutive capital, enabling the company to retain control of its capital. In return, the financier receives a percentage of the company's sales,
  • Adaptive. The company adaptively repays the amount received, based on a percentage of its sales. The amount is therefore relative, and does not depend on an amortization schedule as in the case of a conventional loan. This mechanism applies until the loan is repaid in full, however long that may be,
  • Scalable. As your sales increase, so does your borrowing capacity,
  • A level playing field. The financier only takes into account the company's health and its ability to generate sufficient future sales. They are not interested in the company's history or heritage.

On the other hand, the only disadvantage of RBF is that it is intrusive. The financier is privy to the company's sensitive data, such as its e-commerce, banking and marketing accounts. However, applying for a traditional loan also involves providing the bank with certain confidential information. In the end, this disadvantage isn't really a disadvantage at all, especially if your financier is rigorous about data processing.

How does Revenue Based Financing work?

How does Revenue Based Financing work? It's an alternative financing solution that enables you to turn your sales forecasts into cash flow. The process can be broken down into three distinct stages.

1- Analysis of sales forecasts

In concrete terms, the person seeking financing logs on to your online tools to analyze your financial performance and the contours of your business. This includes access to your various online accounts, such as your e-commerce sales platform and your Google Ads account. All these elements provide valuable information on the health of your business and your ability to repay the loan.

Good to know: By giving access to your sensitive interfaces, you are necessarily giving access to important company data. Be sure to check your data protection policy beforehand.

2- Financing agreement and amount

Once it has analyzed the data provided, the funder makes its decision. If he or she considers the sales forecast to be satisfactory, he or she approves the financing and provides the requested funds in less than 3 days (72 hours). The financial backer makes a quantified proposal based on forecast sales, which can range from several thousand euros to several million. This performance is particularly appreciated by companies in urgent financial need, especially given the time it takes to obtain a conventional bank loan.

Please note: The financier monetizes only a proportion of your foreseeable sales, not all of them.

3- Company reimbursement

In principle, the company's sales will enable it to repay its lender. Unlike a loan, which is strictly based on a repayment schedule, it is possible to adapt the terms and conditions to suit changing circumstances. Repayment is based on a certain percentage of sales, and takes account of income trends and seasonality.

No interest or capital for RBF

Unlike traditional loans, Revenue Based Financing does not involve interest payments or capital repayments. Since the investor receives an amount corresponding to the percentage of revenues generated by the company, his return on investment aligns the interests of the company with those of the financier. In effect, the investor benefits from the company's growth over time, while the company can focus on its objectives and gain peace of mind. If the time of year is less conducive to increased growth, repayment is based on sales rather than a fixed sum. This repayment method builds mutual trust between the company and the investor, who both share the risks and rewards.