Revenue Finance (RF): Is it good for my business?

Traditionally entrepreneurs have three main buckets to source new capital for growing their businesses which include bootstrapping, borrowing, or selling stock (there’s also grants/awards but I’m leaving those out as they usually aren’t standardized and depend on the entity providing the award). 

Bootstrapping can be a great strategy if you have access to the necessary funds to operate your business as you’ll keep complete ownership of the company; however, the challenges include: limited cash which can result in missing market opportunities, can hinder growth and can often add additional stress. 

Borrowing from financial institutions can also be a great source of capital, but it can be difficult to acquire, requires personal guarantees or collateral and has fixed payments. If you have the credentials of getting a good loan then it's usually recommended you do so because there are a lot of benefits including the ability to build your business credit and access to non-dilutive capital. Debt, within reasonable amounts of course, is a fantastic way to leverage any other capital you have raised to increase your capital strategy’s impact. Borrowing from a bank is generally only available after a company has been in business for over a year and is net income positive but working with a local bank or a local bank branch early can help reduce these requirements. 

And then there is selling stock. Equity raising from VCs, angels, family and personal networks is a classic approach to getting additional capital for your business growth needs. Any of these transactions though mean you are selling ownership of your company and these individuals or firms will be partnering with you until the very end and will expect sizable returns. Equity raising can very quickly dilute entrepreneurs so depending on your exit strategy you will want to carefully consider equity each time you want to raise more (ex. 3 small rounds could already leave you around 40% or less of your own business).   

Recently a new source of capital has hit the market and is available to both entrepreneurs with early-stage companies and business owners who are beyond early stage and focusing on growth which is called revenue-financed capital (aka revenue-based financing or royalty financing).  Revenue finance, or RF, is a new source of non-dilutive capital that provides businesses with money in return for a percentage of ongoing sales until the principal investment and an agreed upon additional amount is paid back to the investor firm. 

Let’s take a deeper look into RF and provide you with some additional information for you to be able to determine if it's a viable option for your business. 

What is revenue finance?

Revenue finance is a form of non-dilutive funding where a business receives capital in exchange for a percentage of its future revenues until the payments equal a predetermined repayment amount. Each model can vary slightly and may be unique to the investor providing this form of financing. RF can be an excellent source of capital to grow your business if you are looking for a savvy way to increase your business’s valuation without needing to sell your ownership or take on very expensive cash advances.    

How does it compare to other capital sources?

RF differs from equity and debt financing in several ways. Below are the pros and cons of each type of financing. 

Equity Financing - selling ownership of the business for capital 

Pros: 

• No repayment pressure - its not debt, so you don’t need to worry about making regular payments

• Draws strategic partners - often times the investors bring experience, connections and credibility to the business

• Longer runway - good for R&D heavy, pre-revenue or high-growth companies

Cons:

• Dilution - no monthly payments, but you’ll realize the cost come the day of your exit when you have to pay the ownership given to each equity investor

• Loss of control - investors may negotiate to get a board seat and/or veto rights. Sometimes they might even be able to force the founders out. 

• Long process - getting to a term sheet can be a very time-consuming process.

Debt Financing: borrowing money and agreeing to pay it back over time with interest

Pros: 

• Retain ownership - no need for equity loss.

• Predictable terms - payment schedule is usually fixed.

• Credit building - helps build a positive track record if paid off without issues

Cons:

• Repayment pressure - fixed payments are due regardless of business performance.

• Collateral required - liens or guarantees on the business and/or the founders’ personal assets are usually required.

• Potentially risky - if companies have inconsistent revenues then this type of financing can end up causing more problems than benefits.

• Profitability - most banks will require applicants to be Net Income positive for multiple years before providing a loan.

Revenue Financing: growth capital in exchange for a percentage of future revenues until a set cap is reached.

Pros:

• Non-dilutive - continue growing without losing ownership.

• Flexible payments - payments aren’t fixed and are directly tied to your revenue volume and frequency.

• Quick to fund - process is usually faster than getting an equity or debt deal

• Don’t need to be profitable - but a plan to get to breakeven should exist

• Not an MCA - although self-labeled as revenue based financing, Merchant Cash Advances are completely different and far more costly

Cons:

• Not available to all businesses - works best for companies with recurring or recurring-like revenue

• Tend to be more expensive than bank loans - we always encourage entrepreneurs to get a bank loan or a healthy LOC if it's available, but those are typically not available for the stage of companies that we fund

Comparison table

Feature	Revenue Financing	Equity Financing	Debt Financing
Ownership	No dilution	Dilution	No dilution
Repayment	Variable (% of sales)	No recurring payments; big payout at exit	Fixed
Risk	Lower if sales fluctuate	Low (no payments)	Higher (fixed payments required)
Cost	Med - high (capped return)	High - Very High	Medium (interest)
Ideal for	Growing businesses with revenue	High-growth, R&D intensive,  or pre-revenue companies	Stable, cash-positive firms

If you are interested in learning more about revenue finance or about our specific model at Sage Growth Capital, please visit our website at https://www.sagegrowthcapital.com/. You can always contact us via email or reach out to our team on any of our social media channels.

About Sage Growth Capital

Sage Growth Capital makes revenue-financed investments in companies at any stage who need growth capital. It is our mission to provide a more flexible funding option to growing companies who do not fit traditional equity or lending models. To learn more about Sage Growth Capital or to apply for funding visit: www.sagegrowthcapital.com.

About Revenue-Financed Capital

Revenue-financed capital (RFC), also referred to as royalty financing, revenue share or revenue-based financing (RBF), is a non-dilutive form of growth capital where investors receive a percentage of monthly revenues until a set amount has been paid. RFC differs from equity financing as the investor does not obtain ownership of the company and it differs from debt financing as there is no collateral required and payments are variable. RFC is designed to empower entrepreneurs to grow their businesses with non-dilutive capital that aligns with their sales cycles.