Revenue Based Financing (RBF): what is it?
Definition of revenue based financing (RBF)
Revenue Based Financing (RBF) is a new financing solution based on a company's future revenues. Originating in the United States, RBF enables companies to finance their growth very rapidly and in a non-dilutive way. In other words, the business owner retains full independence from the company. Dilutive financing involves investors acquiring a stake in the company, whereas non-dilutive financing has no impact on the company's shareholder structure. The entrepreneur remains in full control, retaining all decision-making powers.
It is a way for companies to raise capital by promising a percentage of future revenues in exchange for the money invested.
Dilution occurs when a company issues new shares that result in a decrease in the percentage ownership of existing shareholders in that company. Share dilution can also occur when holders of stock options, such as employees of the company, or holders of other option securities exercise their options. Dilution is therefore the situation where the founders of the company see their percentage of ownership of their company's share capital decrease while the number of outstanding shares increases. In concrete terms, when dilution occurs, the number of shares owned by the founder does not change, but his or her percentage ownership and value decreases.
The creation of the RBF
The RBF is a unique model created in the 1980s by Arthur Fox. This alternative to traditional financing methods such as bank debt and capital increases was so successful that in 1992 and 1995, Arthur Fox created two specialised funds. The concept is modern: to bring in cash on the basis of future revenues without diluting capital.
Arthur Fox is an American engineer and MIT graduate. After working at Westinghouse and Hewlett-Packard, he became a successful entrepreneur and business angel in the 1970s and 1980s. In search of alternative financing, his innovation of Revenue Based Financing met with enormous success: the internal rate of return of his two funds exceeded 50% and the capital invested was generally recovered in only about thirty months.
Who is Revenue Based Financing (RBF) for?
The way digital companies are financed
Revenue Based Financing is the best financing method for software publishers SaaS or e-commerce, subscription-based digital business models, D2C brands, service companies, and more broadly for all businesses.
These activities benefit fromgood visibility on cash flows cash flow but are looking for short-term ROI investments such as customer acquisition, marketing, recruitment or product development.
It is in fact a cash advance allowing the release of non-dilutive growth capital. In exchange, the financiers receive a percentage of the company's turnover or a commission. Nevertheless, as with any financing solution, RBF may involve certain risks, provided that the company applying for this financing does not meet its eligibility criteria.
An accessible funding model
FBR is faster and more accessible than other financing options and has several application areas.
Revenue Based Financing is therefore accessible to many companies, regardless of their size! It is the most democratic way of financing that exists today. You don't need to have tangible assets, plant or machinery, or even be profitable straight away! The eligibility criteria for RBF do not take all this into account, unlike other traditional financing methods.
The way RBF works is simple: the amount of the monthly payment is calculated according to performance: in return, the financer takes a commission, which generally varies between 4 and 10% of the amount financed... and that's it! No personal guarantee, no dilution, you remain the sole owner of your business.
How do you know if you qualify for Revenue Based Financing (RBF)?
RBF eligibility criteria
- 9 months of commercial activity;
- 300 000 € of income over the last 12 months;
- Company or entity based in France.
You must also have good prospects for growth. These will be analyzed according to different indicators by our algorithm and will allow us to quickly decide on the eligibility of the company.
Indicators to watch for to be eligible for RBF
There are a number of indicators that best assess a company's growth prospects. Each RBF lender has its own formula for calculating and evaluating companies. Here is a non-exhaustive list of the main metrics to watch closely.
- LTV (Lifetime Value) measures the overall value added by a customer to the company over the duration of their joint relationship;
- CAC (Cost of Customer Acquisition) measures the total combined cost of marketing, sales and business expenses to acquire a customer;
- The Churn rate is the churn rate of a SaaS company;
- The MRR (Monthly Recurring Revenue) is the amount of revenue the company intends to achieve each month;
- TheARR (Annual Recurring Revenue) is obtained by multiplying the MRR by 12 ;
- ARPA (average revenue per account), ARPC (average revenue per customer) and ARPU (average revenue per user) measure the value that a customer generates for a SaaS company;
- Reactivation is an indicator that measures the number of customers who have previously cancelled their subscription and have taken out a new paid subscription;
- Visitor - Lead and Lead - Customer conversion rate: this compares the number of visitors to a company's website who become Leads (i.e. who leave their details and start interacting), and then looks at the percentage of leads that are converted into customers;
- NPS (Net Promoter Score) is a key indicator of customer satisfaction: it is the likelihood that one of your customers will recommend your SaaS solution to others. Under this prism, each customer is categorized as a promoter, detractor, or neutral person;
- The average length of the sales cycle is from lead generation to the actual purchase by the customer.
How does Revenue Based Financing (RBF) work?
Subscribe to a Revenue Based Financing solution
In order to study the eligibility of companies for FBR, lenders start by connecting throughopen banking to the management tools used by the company to analyze a panel of financial ratios and performance indicators.
By having access to bank statements, but also to the tools used such as Stripe, Shopify or Facebook Ads, lenders have immediate visibility on the company's traffic, turnover, churn rate and other KPIs.
After a detailed assessment of the applicant's performance and growth potential, a scoring algorithm analyses this data to establish eligibility. The RBF amounts are then transferred to the company's accounts.
This process usually takes much less time than a bank loan or fundraising. Some lenders allow you to do all the paperwork online and provide a response very quickly, within 48 hours or more.
The European Services and Payments Directive (PSD2), which came into force in 2018, established open banking. Open banking is a technology that allows banks to share their data, in a secure manner, to other players in the financial ecosystem, such as fintechs. By facilitating access to data on assets and financial transactions, open banking has contributed to the emergence of fast financing solutions adapted to the business model of online platforms. Revenue Based Financing players can thus directly analyse the solvency of digital companies and help them manage their cash flow.
Repayment in a few months
The consideration to be paid may take the form of a commission which may or may not be calculated on the basis of the company's future income.
The amount of the monthly instalments to be paid is calculated according to the monthly financial results of the company. The amount is therefore flexible, unlike the monthly instalments of a bank loan. The company that received the cash will repay the investor monthly over six, nine or twelve months.
What is Revenue Based Financing (RBF)?
To prepare for fundraising
RBF is a good solution to get cash quickly to finance quick ROI (Return On Investment ) operations or when you want to take advantage of favorable or unexpected business opportunities.
This system can complement or prepare for fundraising by allowing you to release short-term funds quickly, without additional dilution. The difference with fundraising is that fundraising will allow you to raise money for long term expenses, while Revenue Based Financing will allow you to fund short term growth actions.
RBF is therefore very complementary to fundraising, as it helps companies to invest very quickly in their growth.
To finance its growth
Are you behind in your cash flow? Or do you need a cash advance? Would you like to self-finance through your customers? Are you hesitating between self-financing or raising capital? RBF is the ideal solution for companies looking to finance their cash flow rapidly. In a way, it's a quick, easy-to-obtain, non-dilutive cash advance that makes it possible to release growth capital, such as seed capital, almost immediately.
With this cash, the company can implement the marketing actions necessary to acquire new customers and convert leads. It can also invest in improving its product in order to retain its customers and convince them to pay more by developing a service that fully satisfies them.
To finance its stocks
Good stock management allows companies to respond as quickly as possible to customers' needs and to ensure better satisfaction and loyalty. Financing to produce and keeping the optimal level of stocks to avoid shortages while limiting storage costs is thus a major challenge for companies.
Inventory financing is a solution to free up capital held in your inventory: it often involves taking out a loan to pay for your inventory, while retaining ownership of the products.
When you sell the products, you pay back the investor. This system helps you to respond quickly to increasing demand, especially if you are just starting your business. It is a particularly good mechanism for SMEs whose cash flow needs exceed their receivables.
To finance its working capital
Working Capital Requirement is the amount of money needed to finance expenses without needing to collect customers at the same time. It is essential to take it into account when preparing a business plan for a new company. In particular, it allows you to anticipate cash flow problems. A bad estimate linked to the WCR is one of the main causes of failure for young companies.
When a company's working capital falls below its WCR, it is obliged to find an alternative short- and medium-term financing solution. Revenue Based Financing is one of the best ways of financing working capital, thanks to its speed and flexibility.
What are the advantages of Revenue Based Financing (RBF)?
RBF is a non-dilutive means of financing, based on the future income of the business . Specifically, with some lenders, if your sales drop in a certain month, your royalties will be reduced. Conversely, if your sales increase the following month, the amount to be donated will increase accordingly.
This allows you to release non-dilutive growth capital, without having to sell off any of your shares. You remain in control of your company and are not accountable to your business angels.
FBR allows for faster funding times: at Karmen, the funding process is 48 hours from application to receipt of funds in the recipients' bank account. The speed of the process allows you to have all the funds you need at the beginning of each month to fund your growth.
The RBF offered by Karmen is an accessible financing alternative: applicants can fill in the online form in a few minutes. Moreover, no personal guarantees are required and we adapt to your needs. In fact, we analyse your ability to increase your income sufficiently to cover loan payments and operating expenses.
The RBF is a new financing scheme that is based on the company's future revenues. This alternative to bank loans also has the advantage of being accessible to many types of businesses. It does not require profitability criteria or exponential growth forecasts. You are not required to build a file to convince that your project is the best and does not require disproportionate personal guarantees or sureties!
Comparison of RBF with other financing solutions
RBF vs. professional bank loan
The bank loan is a loan repayable by the company according to monthly instalments fixed in advance by the bank. It is a loan that is granted under very specific conditions, intended for professionals, more advantageous and less restrictive than a classic loan intended for individuals.
The main disadvantage of a bank loan is that it requires a lot of time and energy to try to obtain. Applying for a loan is very time-consuming and requires a lot of preparation to gather as much information and forecasts as possible to make your project credible.
The loan is not adapted to all types of requests and the amount can be quickly limited: the profitability is important for banks and can handicap you during your launch. Some B2B banks are quite hostile to financing tech companies and SaaS.
It is also a financing system that leaves little room for flexibility: in the case of a business start-up, the loan generally varies from 5 to 7 years and is most often repaid over 7 years. The longer the term, the higher the nominal rate. This means that you may find yourself in a loan for several years with high monthly payments.
In turn, RBF requires no personal guarantees, the investor has no direct ownership in the business and does not require fixed payments. At Karmen, we analyse your ability to increase your income sufficiently to cover loan payments and operating expenses. The repayment of the investment will be proportional to the performance of the business.
RBF vs. fundraising
The benefits of fundraising
Fundraising corresponds to an equity investment by professionals or investors. The entry of an investor into the capital is temporary (on average between 3 and 7 years) and is part of a logic of realising capital gains in the shortest possible time.
A fundraising brings liquidity to the company, allowing the founders to have all the means for the next stages of their start-up's development. This contribution does not have to be repaid and thus promotes better visibility and credibility on the market. In addition, the investors can act as mentors and advise the partners with an external view on the strategy.
The disadvantages of fundraising
However, preparation for fundraising is time-consuming and energy-consuming. Instead of focusing on the operations of their business, founders have to create presentations, practice presenting them, canvass investors, apply and meet with them many times. Moreover, there is no guarantee that a fundraising round will go well. If successful, the negotiations and subsequent clarification of the legal framework can be challenging.
Above all, fundraising means dilution capital! In fact, in return for their financing, investors take a percentage of the company's share capital. In other words, the company belongs to them in part, which gives them decision-making power over the company's strategy. The founders, whose interests (long-term growth) differ from those of the investors (short-term capital gain), are then accountable to the latter. Recurring reports on the financial health of the company, dialogue steps and debates with investors can be time-consuming and counterproductive.
Finally, having too much liquidity at once can be detrimental to the company by disconnecting them from the needs of the market. Indeed, rather than seeking to create a relevant solution for its customers that will enable it to make a profit quickly, the company that has raised a colossal sum no longer has a good sense of priorities. It may be tempted to invest large amounts of money in innovation without being sure that the final product is sound. This logic can sometimes result in significant losses, whereas having less cash at the outset would have allowed the company to focus on a relevant response to the needs of its market.
The RBF seems to be the best alternative to fundraising. This financing system allows you to ensure the non-dilution of your share capital (and therefore an independent management of your company), an immediate cash flow (less than 48 hours) and finally, it is a low risk financing.
RBF VS Love Money
Love money is generally the money provided, in the first instance, by the close friends and family of entrepreneurs. Investors or donors benefit from tax reductions and exemptions.
This funding can take the form of a non-dilutive donation or a dilutive equity investment. Although this system of financing can be fast and effective, it nevertheless requires a well-to-do entourage ready to take risks to invest in your project. Revenue Based Financing thus seems more accessible than love money since any company with at least 9 months of commercial activity and 10 000€ of monthly revenue can apply for financing from Karmen.
RBF VS Honorary loan
The non-dilutive, zero-interest "prêt d'honneur" is a loan financed by the region in which the business is located. The recipient undertakes on his or her honour to repay the loan 3 to 5 years after receipt.
While this alternative to traditional loans is much less expensive, it is still time-consuming. Given the sometimes low probability of obtaining financing and the limited amount of loans granted, Revenue Based Financing is a faster and more efficient method of financing. Karmen allows founders to remain focused on their operations by ensuring a 48-hour financing process from the time of the financing request until the funds are received in the beneficiaries' bank account.
For more information, please consult our article: " What is an honor loan? "
RBF VS microcredit
The microcredit is a non-dilutive method of financing intended for companies that have difficulty accessing bank financing. Its aim is to enable project leaders to create or perpetuate their project by granting a loan that is more accessible than traditional bank loans. It is generally offered by associations
Less costly than traditional loans, this scheme is often accompanied by monitoring of beneficiaries (assistance with administrative procedures, help with cost control, business development, etc.). However, it concerns very limited amounts and requires numerous steps to be taken in order to benefit from it. Here again, Revenue Based Financing seems to be more suitable for many companies as it allows them to obtain substantial non-dilutive financing quickly and with flexible monthly payments.
RBF VS Crowdfunding
Crowdfunding is based on a system of collecting donations or loans. The participatory donation can be with or without consideration. Thus, equity crowdfunding (or participatory investment) is dilutive and implies the entry into the capital of the company of the capital providers, whereas donation crowdfunding is non-dilutive.
However, this funding system is characterised by the uncertainty of reaching the funding targets. In addition, it requires a lot of time spent communicating about the project to be financed and the sums obtained are very often limited and reserved for the implementation of a restricted objective. Revenue Based Financing, on the other hand, allows you to obtain substantial funding with the possibility of allocating it as you see fit!
For more information, please see our article: " What are the best crowdfunding platforms? "
RBF vs venture loan
The venture loan is one of the means of financing that is done through a loan with a high interest rate, repaid in monthly or quarterly installments. It has many advantages such as the possibility to reach initially set objectives when a fund raising is insufficient, and also allows to extend the cash flow up to six months.
Compared with RBF, venture loans can cost you more in the long run. Although the solution is quick and enables you to release funds for immediate financing needs, repayment of the loan amount is much higher than with RBF.
RBF vs. royalties
Royalty crowdfunding is a type of participatory financing that allows entrepreneurs to mobilize investors without diluting their capital.
The advantage of the RBF solution compared to the royalties crowdfunding is mainly the delay to release the funds. With RBF, you receive the funds in 48 hours on your account, while the second solution will require a much longer campaign.
RBF with Karmen
The benefits of Karmen
Karmen is the simple and accessible solution to finance your digital business in France.
Test your eligibility for FBR in a few minutes and receive your funding in just 48 hours. To do this, nothing could be simpler: just fill in the eligibility form. Then, you connect your various banking, accounting and marketing tools to the platform and that's it!
Karmen charges a fixed and transparent commission on the financing provided. The cost of Karmen's financing depends on the performance of the recipient company and the repayment period (6 to 12 months).
Why does Karmen want to democratize Revenue Based Financing (RBF) in France?
While business models are changing and more and more companies are operating on a subscription basis, funding systems remain unchanged and are not adapted to this new economy.
Created in 2021, Karmen provides an alternative to fundraising and bank loans. It is the only company to have developed an offer entirely dedicated to players operating in the subscription-based consumption sector (SaaS, business services, B2C subscriptions, apps, gaming, etc.). Its mission is to support digital companies in their cash flow optimisation.
To learn more, read our article on our 50 million euros in debt!
How do I subscribe to Revenue Based Financing (RBF) with Karmen?
In order to benefit from Karmen's FBR financing, you need to fill in an online form in a few minutes to give access (read only) to the banking, billing, accounting and marketing tools you use.
All data and documents collected are secure and encrypted and of course strictly confidential. A confidentiality agreement can be signed directly on the platform when registering.
After a detailed study of the candidate's performance, our scoring algorithm takes into consideration many factors allowing us to decide on eligibility within 48 hours. At Karmen, there are no registration fees or application fees!