Revenue based financing: What it is and how to get started

If you’re looking online for revenue based financing, one or more of the following situations might resonate with you:

• You need cash to scale your business or for your daily business needs, but the industry means you don’t have tangible assets or your revenue is non-contractual. This means you may find it difficult to get funding from a traditional source like a bank or lender.
• You’ve been able to get funding from your bank, but it’s hard to adjust the repayment period or amount of funding. This lack of flexibility means you might struggle with repayments you can’t afford or be unable to get additional funding to put into your growing business.
• You need to know how much money you can access so you can forecast accordingly, which is not possible with traditional banks.
• You’re based in Ireland and want a funder that can cater to you. You’re potentially looking to expand internationally now or in the future. 

In this article, we’re going to take an in-depth look at revenue based financing (RBF), including how it works, when it makes sense as a funding option, and how to get started with Financefair. 

• What is revenue based financing?
• How does revenue based financing work?
• When does it make sense to choose revenue based financing?
• How to get started with Financefair
• How much does RBF cost?
• What we do and why partner with Financefair
• How Zeus Scooters used revenue based financing to scale

Note: If you’re ready to discuss the funding we can offer you to help your business growth, fill out our online funding application form. 

What is revenue based financing?

Revenue based finance is a type of funding that unlocks liquidity that’s trapped in the recurring contracted or non contracted revenue in your business. The contracted revenue is exactly what you might expect: recurring income where there’s a contract in place, for example a management agreement for a building. This is different to non-contracted revenue, like the revenue in an ecommerce business. With revenue based financing, you can fund against both contracted and non contracted future revenue.

If you have capital trapped in long-term contracts, revenue based finance allows you to get an advance on those funds. You can then use that capital to grow your business, pay for operating expenses or fulfil a new contract. If you have capital trapped in future subscriptions (e.g. subscriptions coming via Shopify or Stripe), you can also use revenue based financing to help grow your business.

The amount of funding you can access is based on your future cash flow and is therefore flexible and adjustable according to your requirements and monthly revenue streams. This is in contrast to other types of financing like a small business bank loan, which is a fixed amount with fixed monthly payments.

Revenue based finance is ideal for businesses that don’t have tangible assets but do have customers and recurring revenue, such as a subscription-based business. This makes it an excellent SaaS financing option. 

How does revenue based financing work?

Typically if you needed funding, you’d go to your bank with a set of projections and get a short term loan based on those numbers. This comes with fixed repayment terms, which you might need to renegotiate if your business underperforms against your projections. 

And if you need to extend the facility because your business is growing faster than expected, you’ll have to reapply. This leads to a lot of time spent on admin, dealing with delays and long response times, paperwork and managing the funding rather than focusing on your business.

Revenue based finance gives you the opportunity to put a working capital facility in place that’s directly connected to the growth of your business. 

For example, with Financefair you can convert up to 20% of your future annual recurring revenue (ARR) into upfront growth capital. This allows you to fund your own future without debt financing or raising capital, using your own contracts. As your business and revenue grows, so does your ability to gain access to increased funding.

We look at your projected income for the next 12 months and your expected growth rate. Based on those numbers, we can offer up to 20% of Annual Recurring Revenue (ARR), or 70% of your quarterly income. We can then advance the funds on a quarterly or monthly basis, and adjust the funding based on how much you’ll grow.

Here’s how RBF works in a growing business:

• Let’s say your business’ assumed sales growth rate is 25%, with month 1 bringing in revenue of €250,000.
• With a growth rate of 25%, here’s the expected income for the next 6 months:

• Let’s say we’ve agreed to advance funds of your first 3 months of income, and then every month after that.
• Month 1, Day 1, we’ll advance 70% of your first 3 months of income
  • That’s M1 + M2 + M3 = first advance. So €250,000 + €312,500 + €390,625 = €953,125
  • Then 70% of those months combined. So 70% of €953,125 = €667,188
  • Month 1, Day 1, we’ll advance €667,188
• At the end of Month 1, when you receive your expected €250,000 income, and will therefore be able to repay 70% of the funding Financefair advanced in the first month.
  • That’s 70% of your M1 income. So 70% of €250,000 = €175,000.
  • End of Month 1, you’ll repay €175,000.
• We’ll now be advancing funds on a month to month basis.
• We’ll look at your projected income in Month 4, which would be €488,281.
• At the end of Month 1 or beginning of Month 2, we’ll then advance 70% of your Month 4 projected income.
  • • 70% of €488,281 is €341,797.
    • Beginning of Month 2, you’ll receive €341,797 in funding from Financefair.
• At the end of Month 2, you’ll receive the expected €312,500 in income, and will repay 70% of the income received in the second month.
  • • That’s 70% of your M2 income. So 70% of €312,500 = €218,750
    • End of Month 2, you’ll repay €218,750.
• Then, we’ll look at your projected income in Month 5, which would be €610,35.
• At the end of Month 2/beginning of Month 3, we’ll then advance 70% of your Month 5 projected income.
  • 70% of €610,352 is €427,246.
  • Beginning of Month 3, you’ll receive €427,246 in funding from Financefair.
• This continues for every subsequent month.

As you can see with this example, the funding you’re advanced acts as a revolving line of credit based on your projected income of the next month, which allows you to use your own revenue to fund your growth.

It’s important to note that the amount can adjust depending on the revenue – it can increase if the revenue grows, and it can be dialled back in slower months. If the revenue projected for month 4 was actually €300,000, you could get 70% of that, which is €210,000. The good news is you’ll still get funding even if your revenue drops – it just decreases in line with your income. 

The advantages of choosing revenue based financing are:

• A lot of flexibility: As previously noted, the funding amount can grow or decrease in line with your revenue. It just takes a conversation with one of our friendly and knowledgeable team members. 
• You’ll get a line of funding that’s directly related to the growth of the business. This gives you a lot of scope for further funding, and it doesn’t matter how fast or slow your business grows. 
• No need for additional applications: You don’t have to worry about getting the amount of funding right first time, not knowing what opportunities might be on the horizon for your business. If you need more financing for more growth opportunities, there’s no need to fill in another application like you would if you wanted to extend a traditional loan – just reach out to us. 
• It’s relatively low risk, which means we can keep security to a minimum. Because the money is only out for 90 days at a time, the risk is moderate. This reduces the security documentation you need to complete when you apply. 
• There’s no dilution and it helps you increase the value of your business: Revenue based finance can help you grow your business without giving away equity. However, it does also work well alongside other forms of investments such as venture capital, private equity or angel investments. If you decide to go down this route in future, a higher ARR will help increase your company valuation which will give you better terms.

When you apply for revenue based financing, we start by looking at the cash flow projections of your business for 12 months, making sure the projections are conservative and tight so the funding is aligned accordingly, and you don’t end up over or under-borrowing. This allows us to identify the peak funding requirement – in other words, the most amount of funding you believe you’ll need in that period of time.

We then approve you for that total amount and agree on the drawdown schedule so when you have a negative cash position, you have enough to cover it. For example, we could approve a funding line of €500,000 per 12 months, but initially we might advance €200,000, and the rest when the cash position is negative. Then you can proceed for the next few months safe in the knowledge that you have a funding line at the level that you predicted you’d need. 

What happens if your revenue decreases? 

If that happens, we won’t stop your funding, but your funding line will decrease. Because we work month to month and quarter to quarter, it’s easy to make adjustments to funding in line with your projections, but it also allows you to plan in advance. 

Since we advance on a quarterly or monthly basis it also means the risk for all concerned is minimal, and this in turn means you only have to fill out a minimal amount of security documentation. Working with recurring revenue also helps risk mitigation, since we know that if the revenue has been stable for a certain number of months, it’s likely to remain stable. 

Because we’re a financial technology company, we use data analytics to expedite decisioning and ongoing monitoring, and there’s no need for you to continuously send us information about your accounts. Instead, we can analyse your transactions and have a conversation if you request to drawdown more for the next three months.  

When does it make sense to choose revenue based financing?

Revenue based financing works best for companies:

• With predictable recurring revenue
• That don’t necessarily have blue chip debtors
• That have contracted revenue or a subscription model
• That are growing fast
• With a turnover of €1 million+
• That would rather not take on debt or give away any (or more) equity

Here are some examples of scenarios where revenue based financing works well:

1. You’re a business that is looking ahead to scale and needs a capital injection. Perhaps you need to take on very skilled people to deliver a contract, or you’re looking for ecommerce financing to purchase stock. Or maybe you’ve won a contract with the government, but the payment terms are long. You might also be considering investing in upgrading your premises. If you’re a business with a few ongoing contracts, a couple more about to start, and a few more you want to tender for, a 12-month RBF facility could get you where you need to be. 
2. You’re a business that’s looking to better manage your working capital cycle rather than operate month to month. RBF can help you meet obligations, pay wages, and pay suppliers on time. Maybe a supplier offers a bulk order discount, and you want the money to place that big order. 
3. You’ve already received investment but the investors are reluctant to put more money in, or you’re reluctant to give away more equity to scale. You want to be able to tender for new contracts with peace of mind that you have the funding in place. Usually a bank would want to see the contract already signed before committing to funding, but we can set up RBF based on an existing contract and use that funding to get other contracts. RBF also works well alongside equity providers like VCs and private equity, if you choose to do that.  
4. You’ve already taken debt before and don’t want to load more on to the business. RBF is a good option if you want funding that’s more flexible, doesn’t sit on the balance sheet and doesn’t require a personal guarantee.

How much does RBF usually cost?

The pricing and terms for your revenue based financing are determined at the outset for a 12-month agreement.

Your fee will be based on:

• Your company
• Your company’s experience
• Average debtor days
• Average debtor book
• Turnover
• Funding limit
• Credit score

We believe in transparency around our pricing and you’ll be aware of all costs right from the beginning. The fees we charge are:

1. Platform fee: This is a joining fee. If you choose to renew your facility after 12 months, the renewal fee is 50% of the joining fee. 
2. Monthly facility fee: This fee is fixed and charged on the facility limit provided. 
3. Discount charge: This varies depending on your credit score. The higher your credit score, the higher the discount on your agreed pricing (and therefore the lower your overall cost of funds will be). The pricing applies to the amount of funding used in any 30 day period. 

We can offer your pricing in two different ways:

1. Per 30 days
2. As a percentage of cost of funding

Here are some examples of how much you might be able to get advanced, as well as the estimated cost per 30 days:

Please note that these are only approximations and that actual costs will vary depending on your business.

You can try our calculator for yourself by visiting our revenue based financing page. 

How to get started with Financefair

Getting started with Financefair is easy:

1. Apply: You have two options to start the funding application process:
   1. Contact us directly to discuss your funding requirements and one of our team can give you a quick indication as to whether we can provide a funding solution for your business. Call +35315252486, email busdev@financefair.com, or book an appointment with one of the team.
   2. Complete a funding application form. It takes less than 5 minutes to complete.
2. Discovery call and offer: We use this to understand: 
   1. Your revenue streams and your debtors
   2. Your business model and your pipeline
   3. If there is existing debt

Within 24 hours, we’ll get back to you. Once we receive your cash flow projections, we’ll be able to present back our proposal. 

1. Onboard: If you accept the offer, our team will onboard you onto the platform. At this point we’ll connect you with Open Banking and run the KYC and AML (to verify your identity) checks. 
2. Funding: When your facility is in place, funding will be in your bank account within 24 hours of successfully becoming a member of our platform.

To be eligible for revenue based financing, your company needs:

• To be a limited company with at least two directors
• To have been trading for at least 2 years
• A minimum turnover of €1M+

The information we need to process your application includes:

• Read-only secure access to your company accounting and banking information via Open Banking so we can verify your company’s current financial position
• Business forecasts and budgets, including a 12 month cashflow model
• Tax clearance certificate
• Latest statutory financial statements

Get started with your application process right away.

What we do and why work with Financefair

Financefair (formerly InvoiceFair) was founded by a team of industry experts with the objective to offer ambitious businesses tailored working capital solutions to help them grow faster.

From the beginning, we’ve been supporting Irish businesses with invoice finance, revenue based financing and business lines of credit.

Here’s what you’ll get when you work with us:

Get a decision in 24 hours

Our technology and processes allow us to get you a response to your application within 24 hours.

Once you’re approved and onboarded, you’ll receive funding within 24 hours.

Once you’ve joined our platform we use data analytics to speed up decisioning for future funding. You also won’t have to keep re-applying for funding and you’ll spend less time on admin.  

Our team has years of financial services experience, and the breadth and diversity of this means we have a lot of industry knowledge between us. Our knowledge and track record overlaid with access to real-time data allows us to evaluate, approve and monitor risk effectively. 

Use a funding line that’s a better fit for your business

We can tailor funding solutions to your business when others can’t. This is possible because we:

• Base our decisions on real time accounting and banking data.
• Have a variety of financing options that other funders do not.
• Speak to you to understand your business.

Here’s what you need to know about how we support businesses: 

• Our variety of financing solutions makes it easier to find a good fit for you. We’ll work with you and your finances to understand whether a line of credit, revenue based financing or invoice financing would be best for you.
• We offer flexible funding limits: As your business grows, so can your funding limits. Plus, we understand working capital ebbs and flows. That’s why we don’t believe in putting rigid restrictions in place, and even if your projections and revenue decrease, we can adapt. The amount of funding you get will also decrease, but it won’t stop altogether. 
• You don’t have to have traditional debtors to work with us: Businesses with a subscription or recurring revenue model can sometimes struggle to find funding, but revenue based financing means we can still help you. 
• We don’t require a personal guarantee.
• Our pricing is transparent and there are no hidden fees or costs.

Access more capital with our unique business model

One of the unique selling propositions of our business model is that the funding comes from a variety of institutional investors. We work with multiple funders, which decreases the concentration risk of your funding. 

Banks usually limit the amount of funding they can provide, since your funding is mostly coming from that one bank.

Our operating model means you can access more money, as €1 million working capital could come from multiple funders.

For you as an SME, this means you can more easily request and access more funding.

How Zeus Scooters used revenue based financing to scale their business

Irish company Zeus provides their customers the world’s first 3-wheeled electric scooter with state-of-the-art technology for a reliable, safe, and smooth ride. Their mobile app operates across almost 40 cities in 6 countries and 2 continents and attracts over 100,000 customers per day.

For Zeus, the company’s speed of growth depended on how quickly they could secure funding for upfront infrastructural costs and more vehicles as adoption numbers rose in a new market.

The options were: 

1. Raise restrictive or expensive equity and potentially give up ownership of a portion of their business.
2. Access inflexible long-term debt.

Zeus needed a solution that matched their growth plans without restricting their cash flow runway, business operations, or having to give up equity. 

Revenue based financing was the ideal option, as it meant Zeus could leverage up to 20% of their future annual recurring revenue (ARR) to buy the scooters needed to expand into new territories.

Founder and CEO Damian Young said: “We operate in a relatively new, very fluid, and fast-changing category. It can be difficult for more traditional funders to see the opportunity and they can be reluctant to support new business models.”

Zeus worked with Financefair to access funding that was based on their revenue, rather than debt or equity financing. We structured their financing solution so they could repay based on the cyclical nature of their business, which included moratoriums and monthly repayments when it worked best for them.

“Their solution really did demonstrate a total understanding of our business and allowed us to utilize our most valuable assets – our customers – via our future cash flows (ARR) to increase stock levels, expand into new territories, and really grow our business.”

Read more in the full Zeus Scooters case study. 

Grow your business with revenue based finance and Financefair

In this article, we’ve taken an in-depth look at revenue based financing, including how it works, when it might make sense for a business to try RBF and how to get started with Financefair. 

If you’re looking for funding to grow your business, to better manage your working capital cycle or instead of giving equity away in return for investment, revenue based finance could work very well for you. If you’re ready to get started, reach out to us to talk about how our financing solutions could help support your business needs.