The Skinny On Revenue-Based Financing Solutions

You may have recently heard the buzz about Revenue-Based Financing (RBF). Hailed as the saving grace of tech companies since COVID-19 hit, we’ve done a deep-dive on everything you need to know about the system used by ClearCo, Capchase and Wayflyer. Including the catch.

For the uninitiated, RBF is a model of paying back lenders in which the amount paid back is tied up with the business’s ongoing revenue. No… it’s not Resting Bitch Face! It is seen as antidotal to the capital investments of yore, where enterprises have traditionally received a lump sum return over a fixed number of years. RBF comes in where several, seismic macroeconomic events that will almost certainly affect your finances – COVID-19, Ukrainian war, supply chain issues, inflation – have left off, meaning that those seeking investment gain a myriad of benefits such as a vastly quicker turnaround, much less paperwork, and access to more knowledge in the e-commerce space.

While buzzy, the concept isn’t entirely new. RBFs and their counterparts have been used for years in places like the oil and gas industries to finance the high upfront costs of business. But in recent years, these loans have generated interest from investment companies looking to expand into other areas, like technology. For businesses, revenue-based financing can give access to capital without some of the downsides associated with more common types of financing. RBF platforms evaluate applicants’ historical and projected revenues to determine their eligibility and funding amount. There is no need to provide collateral over the funding. Unlike traditional debt financing such as bank loans, revenue-based financing solutions are tailored to your working capital cycle, and remittances are based on a percentage of your daily sales. If sales aren’t very high, the amount collected will be lower, so there’s less impact on your cash flow. Meaning if your stock is stuck in, say, the Suez Canal, you have wiggle room with an RBF and don’t have to
pay anything back before your stock has been sold.

So then, where’s the catch?

As it stands, most competing RBF providers (18 RBF start-ups have been founded in Europe since 2019, according to Sifted) ask applicants for access to a variety of data points, namely the platform they use for payments and/or their Google Analytics accounts. They then use their own algorithms to underwrite accounts. Repayments are then set as a fixed percentage of future revenues as well as an RBF-charged interest fee, which sits generally between 5% and 15%. This means that they’re generally more expensive than traditional loans, but will give you a shot if you’re a high-risk start-up, something legacy banks rarely back.

Big dogs in the arena are US-based but Europe-headed, with names like Clearco, Capchase and Dublin-based fintech Wayflyer raising hundreds of millions both here and across the Atlantic.

“Everyone does it a little bit differently, but the way we use revenue-based financing is to provide a sum of money … which the company agrees to pay [back as] a percentage of their revenue until they’ve paid a set sum,” said BJ Lackland, co-founder and chief investment officer of IBI Spikes Fund told Business News Daily. “The key to the whole thing is if a company grows faster than expected, they pay us in a shorter period of time, which means our ROI goes up. Or it may take longer than we expect, meaning ROI goes down.”

Okay. I’m a tech founder looking for immediate funding, where gets me cash fastest?

If there’s one thing anyone in this space can agree on, it’s that traditional banks do not cater to the growing digital economy. A fundamental transformation from an economy built on tangible assets towards an economy of intangible assets has a profound impact on how companies are financed. Lending capital quickly is not built into their business model. The biggest RBF players such as Silver, Wayflyer and Capchase all boast a turnaround time of 48 hours from application to bank, making use of their own algorithms, oftentimes via AI, to underwrite the loans. This means that the old methods of debt funding are just that, old, and rather unfit for purpose in a fast-paced and competitive field.

Take for example the Wayflyer story. Since hitting unicorn status earlier this year, Aidan Corbett and Jack Pierse’s brainchild has had two significant funding rounds for its growth platform, raising $300m in May and another $253m just last month.

“I think Wayflyer have done an amazing job at what they do, even though they may have taken a different approach to us. It’s a good thing because it attracts more attention, educates more people about RBF,” Daniel Lipinski, CEO of Outfund, the company taking over the now-defunct Clearco’s international clients recently told Silicon Republic.

“And at the end of the day, that’s all we want – education of this new product, because there are lots of people that still don’t know about it. And the more people thinking about it, the better.”

That said, when it comes to building capital, it may seem like RBF is a quick fix. At the end of the day, it is a loan, and while there are fewer strings attached to the money, treating it flippantly is a recipe for disaster. “It’s incredibly flexible, but it’s still a loan,” Lackland said. “You need to be ready to handle those obligations. We try to make it really light on entrepreneurs, but we’re a
capital provider, and we have an obligation to our investors.”

As each company is a distinct entity with unique needs, we are here to help business owners solve the key strategic challenges they face. From fundraising & valuations to advising on strategic acquisitions, we offer corporate finance solutions for any and every issue that your business might face. Running a business isn’t always plain sailing, but we’re here to help you weather any storm, with a wide range of expert services on offer. For those looking for help to raise capital, give Fitzgerald Power a call today!