Business Revenue Financing, also known as Revenue-Based Funding (RBF), is a means of securing funding by giving investors a percentage of total future revenue based on previous (and projected) sales revenue figures. Often described as a hybrid of the traditional equity funding model, it provides the entrepreneur a funding source based on the performance of the company without having to actually sell equity, and at the same time provides the investor the opportunity to benefit directly from company growth without buying equity in the company. Also different from the standard debt model, the entrepreneur also only pays on realized income revenue, so the payments are variable and tied to the company sales numbers. If the company has zero revenue in one month, no money is owed to the investor for that month. RBF is considered a relatively new form of funding and is continuing to gain in popularity.
RBF is good for companies that are selling product but lack assets to secure bank loans. It is also an attractive option for companies with variable revenue and financing needs, as the payments will increase or decrease according to revenue streams, allowing them to vary with your needs. Companies like restaurants, manufacturing, or brick-and-morter-heavy start-ups may not be as good a fit for this type of financing. This type of funding is typically found through angel investors or firms that specialize in RBF.
Advantages for investors are the high upside potential without the need for exit to realize return. On the entrepreneurial side, there is no required company evaluation or management guarantees with the contract, and the owner retains full control and ownership of the company. The terms for revenue-based financing are based on previous revenue numbers as well as forecasting. They typically include a set percentage of revenues which is paid out for the life of the company of until an agreed upon overall ceiling cap is reached.