Revenue-Based Financing (RBF)

What is revenue-based financing?

Revenue-based financing (RBF, in German umsatzbasierte Finanzierung) is a form of financing that the company repays with a fixed percentage of its ongoing revenue until a previously agreed total amount is reached. The total amount is a fixed multiple of the capital paid out, for example 1.1 times: for EUR 100,000 of financing, EUR 110,000 is then repaid, however long it takes.

The financing is aimed at companies with recurring or easily forecast revenue, such as software providers with monthly recurring revenue (MRR) or online retailers with stable sales. The funds typically go into marketing, inventory or other spending that translates into revenue within a foreseeable time. Providers are specialised financing platforms and credit funds that base their decisions on account, payment and accounting data transmitted on an ongoing basis. Legally, RBF is structured, depending on the design, as a loan or as a purchase of future receivables from customers. The supervisory classification, accounting treatment and collateral depend on this. In Germany, commercial lending is a banking business requiring authorisation under the German Banking Act (Kreditwesengesetz, KWG), and the ongoing purchase of receivables as factoring is a financial service requiring authorisation.

How revenue-based financing works

Three quantities determine the contract:

• Amount paid out: It is based on monthly revenue or recurring revenue and is often one to several times one month's revenue.
• Total repayment: the capital plus a fixed fee, often in the single-digit to low double-digit percentage range of the amount paid out. It does not depend on the term.
• Repayment rate: the share of monthly revenue that flows to the capital provider until the total repayment is reached.

Formula: Total repayment = amount paid out × (1 + fee); monthly instalment = repayment rate × monthly revenue; with constant revenue: term in months = total repayment / monthly instalment

Because the instalment is measured against revenue, it falls in weak months and rises in strong ones. This protects liquidity when revenue declines but shortens the term when business goes well. Many contracts limit this flexibility through a minimum instalment, a maximum term after which the remaining amount falls due, or a right of termination in the event of a marked fall in revenue. The contractual definition of revenue also affects the instalment, for example whether value added tax, refunds and fees of payment service providers are deducted.

Cost of RBF compared with loans and equity

The fixed fee is not an annual interest rate. Its effective burden depends on how quickly repayment is made: the same fee weighs considerably more with repayment within twelve months than over two years. For comparison with a bank loan, the effective annual interest rate is therefore calculated from the expected payment series. The yardstick is the internal rate of return: the return that results from the amount and timing of all payments, annualised.

Compared with a bank loan, such as an overdraft facility, RBF is usually more expensive. However, it does not require classic creditworthiness with several years of profits or customary bank collateral and is available more quickly. Compared with equity, there is no dilution: the cost is conclusively determined by the fee, whereas equity costs a permanent share in every later increase in value. For a company whose value rises significantly, RBF is therefore often the cheaper source. Where revenue development is uncertain, it is the riskier one, because repayment has to come from ongoing revenue.

Uses and limits of RBF

RBF is suited to spending that pays for itself within the term: advertising budgets with a measurable payback time, inventory with a known turnover period, seasonal pre-financing. A short CAC payback, that is, the time until the cost of acquiring customers has been earned back, gives a good indication. RBF is unsuitable for research and development, permanent hiring and covering ongoing losses with no foreseeable turnaround, because such spending does not generate timely revenue from which the instalments could be paid.

Providers examine above all revenue history, gross margin, customer churn (churn rate) and dependence on individual customers or sales channels. Because they evaluate data continuously, they can stop further payouts at short notice if the metrics deteriorate. A liquidity plan that builds in RBF as a fixed source must take this case into account.

RBF contract, funding round and sale

Besides the payment terms, RBF contracts often contain collateral such as a global assignment (assignment of all customer receivables) or a pledge of the bank account. Added to this are a negative pledge that excludes further secured financings, information obligations and a right of termination on a change of control (change of control). Early repayment is usually possible but often does not reduce the fee. If several RBF financings run in parallel, the repayment rates add up, and a considerable part of revenue flows out immediately.

In a funding round, investors examine how much of ongoing revenue is tied up and whether funds from the round go into repayment. In a company sale, outstanding RBF amounts count towards net debt. They are deducted from the enterprise value in the purchase price bridge, thereby reduce the purchase price for the shares (equity value) and generally have to be repaid in full at closing.

Worked example: calculating revenue-based financing

An online retailer with net revenue of EUR 500,000 per month finances advertising and inventory with EUR 500,000 of RBF. The fee is 10%, so the total repayment is EUR 550,000; 10% of monthly net revenue is repaid. The effective annual interest rate is calculated in each case as the internal rate of return of the monthly payment series and annualised with compound interest.

• Revenue constant at EUR 500,000: instalment EUR 50,000 per month, repayment in 550,000 / 50,000 = 11 months, effective annual interest rate about 21%
• Revenue falls to EUR 400,000 from the first month: 13 instalments of EUR 40,000 and a final instalment of EUR 30,000 in month 14, effective annual interest rate about 17%
• Revenue grows by 5% per month from the second month: repayment in 9 months, the last instalment reduced, effective annual interest rate about 24%
• Comparison with a bank loan: EUR 500,000 at an assumed 8% per year, repaid in eleven equal monthly instalments of interest and principal (annuity), costs about EUR 20,200 in interest instead of a EUR 50,000 fee
• Comparison with equity: EUR 500,000 at a valuation of EUR 10 million before the round corresponds to 0.5 / 10.5 = about 4.8% of the shares; on a later sale for EUR 30 million this is about EUR 1.43 million

The example shows both sides. RBF is more expensive here than a bank loan, and the fee weighs more heavily the better the business performs. Compared with equity, RBF is cheaper by a multiple as the company's value rises. In return, 10% of revenue flows out for eleven months, which is missing in operations.

Distinction: RBF, venture debt, factoring and overdraft facility

• Venture debt: loan with interest, a fixed repayment schedule and usually option rights (warrants) for venture-backed companies. RBF bases the instalment on revenue and usually does without option rights.
• Factoring: sale of receivables for goods and services that have already arisen. RBF finances future revenue that has not yet been invoiced.
• Overdraft facility: credit line from the company's main bank with a variable interest rate on the amount actually used, depending on creditworthiness and collateral.

Common mistakes

• Fee confused with annual interest rate. A fee of 10% sounds cheap but, with repayment in eleven months, corresponds to an effective annual interest rate of about 21%, and more with faster repayment.
• Several financings stacked. Parallel contracts add up their repayment rates. If a fifth of revenue flows out, there is not enough for staff, purchasing and taxes.
• Revenue definition not checked. If the rate is calculated on gross revenue including value added tax, the actual burden rises.
• Long-term projects financed. Development or hiring does not generate timely revenue. The instalments then have to be paid from other funds.
• Termination and change of control clauses overlooked. On a sale or a new round, they can trigger immediate repayment of the remaining amount.

Frequently asked questions

Is revenue-based financing a loan?

Depending on the design. It is often a loan with revenue-dependent repayment, sometimes a purchase of future receivables. Economically it is debt capital in both cases and must be repaid.

Does RBF dilute the shareholders' stakes?

As a rule, no. The capital provider receives neither shares nor option rights, only the agreed total repayment. Individual providers have additional rights granted to them. This should be checked in the contract.

Is revenue-based financing suitable for startups?

Only with ongoing, easily forecast revenue. Providers usually require a revenue history over several months and a stable gross margin. Startups before market entry or with strongly fluctuating revenue tend to finance themselves through equity or grants.

How large can an RBF financing be?

Usually one to several times one month's revenue. The exact amount depends on revenue history, margin and customer retention. The facility is often provided in tranches that can be drawn down again after repayment.

What happens if revenue collapses?

The instalments initially fall with it. If an agreed minimum instalment, maximum term or right of termination on a fall in revenue applies, however, the remaining amount falls due regardless of revenue.

How does RBF affect a company sale?

Outstanding amounts are treated like financial liabilities, reduce the purchase price for the shares and are repaid at closing. A right of termination of the capital provider on a change of control often makes repayment mandatory.

The Roemer Capital view

If an RBF offer is on the table, Roemer Capital, acting as fractional CFO, runs it through the financial model with the expected revenue development. It shows the effective annual interest rate in the base case, the cautious case and the optimistic case. Alongside, it sets out bank financing and an equity round so that the management compares the costs on a common basis.

In Roemer Capital's view, RBF makes sense above all where the financed spending demonstrably earns back its cost quickly. Indicators are a CAC payback of under twelve months and a ratio of customer value to acquisition cost of at least 3 to 1. Before a funding round or a sale, Roemer Capital examines how existing contracts affect liquidity, the purchase price bridge and consent rights.