What is Revenue-Based Financing? 

History of Revenue Based Financing

Revenue Based Financing is based on the opportunity of the subscription business model which generates recurring and predictable cash flow . 

The RBF is based on the use of the company's future revenues by converting these MROs into a cash advance to unlock new growth leverage to finance the company in a non-dilutive manner. 

This financing solution was conceived in the 1980s by an American engineer who graduated from MIT, Arthur Fox. 

To overcome the financing rigidities that still exist today with bank debt and capital increases, he proposes to use future revenues to bring in cash while avoiding capital dilution. 

At the time, the two FBR funds he had created had exceeded a 50% rate of return, and the capital invested had been recovered in just 30 months. 

The democratization of FBR

In recent years, RBF has become the primary tool to complement fundraising in the United States. A recent example of a Revenue-Based Financing success story is the journey of Liquidity Capital, which has raised $500 million solely to provide packages tailored to any business profile. 

In France, the democratization of this system came later, but its progression has been no less rapid in recent years. As an indication, in 2018, the RBF constituted 15% of participatory financing. More recently in 2020, nearly 300 companies had taken advantage of RBF to a number of investments close to 3 million!

Non-dilutive financing

By this vector of financing, the entrepreneur keeps completely the control on his company and has very fast access to the released funds which are without guarantee. Indeed, contrary to the dilutive financing which generates the entry in the capital of the investors, the non-dilutive financing does not imply any shareholding of the company. 

While traditional fundraising allows you to release funds for your long-term expenses, RBF allows you to complete the fundraising by financing short-term growth actions, such as acquisitions. The RBF is a real boost to growth. 

A relevant use of RBF could be if you consider that it is not appropriate at this stage of your development to solicit external venture capitalists. You will then use the RBF as a sure way to improve your KPIs for future fundraising. 

How does Revenue-Based Financing work?

Simplified procurement

Today, traditional credit players look strictly at conventional KPIs or solvency ratios such as a balance sheet, an operating statement or tax returns, all of which are hardly representative of the particularity of a SaaS business. 

With RBF, credit providers become part of the relevant alternative data by connecting to billing, banking, accounting, analytical software and their Marketing/C tools.

RM to retrieve data useful for a fine-grained understanding of the SaaS business model. 

A quick set up

Once the company is eligible to receive RBF funds, the monthly payment amount is calculated based on the company's performance. In return, the funder charges a fee that typically ranges from 4% to 10% of the amount financed. 

The implementation of Revenue-Based Financing is then extremely fast as the first funds released can be available within 48 hours.

After that, these financings increase as the company's turnover increases to accompany the company in its long-term growth. This avoids making a one-shot deal and providing a large amount that cannot be used immediately. 

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The easy way to subscribe to the Karmen FBR
The simplified three-step process for subscribing to FBR.

The fields of application

Revenue Based Financing is an excellent way to finance subscription based digital business models, service companies, SaaS software vendors, D2C brands. 

Moreover, even if RBF can be seen as mainly aimed at revenue generating companies, e-commerce companies for example are equally concerned by the RBF offer. Having the objective to solve the problem of banks being reluctant to lend money to digital companies without assets, RBF is ultimately a model that favors all digital companies. 

The RBF is particularly applicable for three types of digital companies: the digital start-up, the e-Commerce platform and the SaaS. 

RBF for your SaaS 

Revenue-Based Financing is a great alternative to traditional bank loans for SaaS businesses. Small business bank loans often require personal guarantees or collateral, which is not the case with revenue-based financing. 

Obtaining FBR can also happen at a much faster pace than the 6-12 months it takes to obtain equity financing. Finally, even very good SaaS companies may not attract institutional venture capitalists, which can lead to a shortage of equity capital. 

FBR for your digital start-up 

In France, the entrepreneurial ecosystem has been at an all-time high recently in terms of fundraising and valuation. However, several weak signals show us that the market is starting to contract with a probable burst of the tech bubble. 

In this sense, incubators like Y Combinator have warned their startups to slow down their burn rate to sustain their business in the long run in case of fundraising complications. This is where RBF comes in if startups want to avoid bootstrapping, i.e. building their business without external funding .

The certain stability of the Revenue Based Financing method is bound to become the key factor in the funding decision by startups. In fact, Allied Market Research recently projected that RBF would account for nearly $42 billion of the global financing market by 2027. 

The RBF for your eCommerce platform 

As far as e-commerce is concerned, companies mainly use FBR to finance their online marketing expenses. These are often done in bits and pieces and their amounts can vary.

Karmen's fast, responsive and transparent service can be applied in the best way for eCommerce platform founders. Indeed, they can repeat the operation of requesting funding as they develop , avoiding the need to manage too much money from the start.

Revenue-Based Financing and Karmen 

How to subscribe to the FBR?

Karmen is a French start-up founded in 2021 that offers a simple and accessible FBR solution to provide financial credits to French digital companies. Karmen is the only company to have imagined an offer specifically geared towards digital players evolving in the field of consumption by subscription. 

To obtain RBF financing from Karmen, an online form is to be filled in so that Karmen can be integrated in read-only mode with your company's various tools: invoicing, accounting and bank account tools (open banking). 

Obviously, this data collection is fully secured and encrypted so that the confidentiality of the data is not damaged. 

This allows them to have a real time and 360° view on the financial health of the company and thus to give an answer of eligibility within 48 hours and to offer the best financing offers (if eligible). 

Note that there areno application or registrationfees required by Karmen. Forget about administration fees or prepayment penalties with Karmen. 

How is financing with Karmen organized?

With Karmen, the amount of financing can be up to 40% of the company's annual revenue (ARR) and this solution offers a line of financing that increases as your sales grow. 

The objective is to avoid a classic one-shot financing scheme that would see a too large and irrelevant amount of money arrive in thecompany's coffers. Too often, this amount is not used immediately, because it does not correspond to the precise needs of the company. 

In contrast, Karmen prefers to support companies in their long-term growth with additional tranches of funding every 2-3 months. Each tranche of funding requires repayment over a period of 4 to 12 months, and this repayment cycle begins only 30 days after the first grant. 

While we are really here in a short-term financing bracket, the support is spread over the duration with an outstanding amount (amount of financing) that increases crescendo as your income evolves.

You can now test your eligibility for FBR in just a few clicks and get started by filling out the eligibility form (see above). 

Conclusion

When you start a new business project or when you want to expand your business, financing is the key.

Revenue Based Financing is an initiative that will allow you to free yourself from traditional banking rigidities and will save you precious time that you can allocate to less time-consuming considerations. 

Choosing RBF to develop your SaaS ore-commerce business means choosing innovation, speed, non-dilution and transparency over the administrative delays of a bank loan application .

To use this tool in the best way, trust Karmen to passionately support you in getting instant cash flow for your digital business growth.