What Revenue-based Financing is all about
Reaching for the stars is easier said than done for companies in 2023. The current energy crisis, fears of recession and economic fluctuations are just a few of the factors that make investors act more hesitant than in the previous years. This is an unfortunate predicament for companies with growth ambitions, who are finding access to growth financing an ever more difficult task.
Yet, the truth is, securing financing has never been easy for the large majority of companies.
Venture capital is not an accessible option for every company. For example, in Germany, where Silvr has just launched its business, only 601 companies were VC financed in 2021 - and even less in 2022.
It’s also fair to say that not every business wants to get involved with business angels, banks as lenders or the application marathon that comes with public funding. So, what other options are left for entrepreneurs who dream of scaling? Few to none - up until now!
Revenue-based financing reshuffles the cards
Revenue-based Financing stands as a new heavyweight in the financing ring and clears the way for thousands of forward-thinking and ambitious companies. Having emerged only a few years ago, it is already gaining popularity as a funding solution in the USA and, since last year, all around Europe as well.
What is Revenue-based Financing?
Revenue-based Financing (RBF) is a new way for companies with growth potential to obtain financing or debt capital. It can be used as an alternative or in addition to other financing solutions, such as bank loans, which are often tied to guarantees with inflexible conditions, equity financing or VC financing. Revenue-based Financing is also a non-dilutive form of financing, as the company does not have to give up any shares in the company to acquire capital and therefore does not acquire any new shareholders with a say in the matter. Instead, the company pays a portion of the monthly revenue back to the investors for a certain period of time.
How does Revenue-based Financing work?
Revenue-based Financing is offered by neolending platforms such as Silvr, where investors receive a percentage of future revenues in return for their investment. The amount of the revenue share, i.e. the maximum and final repayment amount, is agreed in advance and depends on the revenue performance. The duration of the repayments also depends, flexibly, on the anticipated sales volume. In concrete terms, this means that if things go well, the debt can be paid off quickly; if there are sales difficulties, the repayment period is extended.
The risk is all bore on the neolender, who, as in Silvr's case, hedges their risk by issuing multiple short-term loans (short-term meaning no more than 12 months).
Furthermore, neolending platforms use data to determine not only the sales trends of companies, but also their own investment risk.
Did we say data? Not just any data, but as much data as possible to document previous company sales and make sales forecasts more precise thanks to smart technologies.
To obtain this data, APIs are created with as many payment, e-commerce and campaign tools as possible.
Silvr uses 124 data points to rank sales and score risk. This includes data from Shopify, Meta, PayPal, Google and a good deal of other accounting, banking, marketing and sales online tools. The more access a company provides, the more targeted the rating becomes and the more favourable the percentage revenue share and the commission rate becomes for the company itself.
Instead of focusing on the weakness of many digital companies, namely the lack of assets, Revenue-based Financing focuses on the advantage of digital companies: a vast amount of data.
The human element
Nevertheless, it is not next-generation data retrieving alone that makes the RBF model a success for both the company and the investor. Neolenders need an in-depth understanding of market and industry conditions paired with extensive expertise of business models and buyer personas to make Revenue-based Financing a lucrative business for all parties. A genuine interest in the company to be financed as well as long-term relationships are factors that should not be neglected - that's how we see it at Silvr! We are our clients’ most committed cheerleaders, and are always on hand to advise on all aspects of financing or utilising the obtained capital.
"The best RBFs, and the ones that will be competitive long-term, are the ones that offer a specialist understanding of the customer’s vertical. This includes integrations with their data analytics, marketing tracking and ERP tools which allow them to underwrite more effectively."
Tara Reeves, Managing Director at Eurazeo and Silvr investor
What are the advantages of Revenue-based Financing?
Revenue-based Financing with Silvr enables companies and founders to raise growth capital with the benefits of:
- a fast application process (no business plan needed)
- fast loan approval
- a data-based, unbiased lending process
- no capital dilution, guarantees, collateralisation of goods or other securities
- no future dependencies whatsoever
- stabilising cash flow thanks to revenue-based repayment amounts
What does Revenue-based Financing with Silvr offer in comparison to venture capital, venture debt and bank loans?
Flexibility and independence are the most considerable differences in obtaining growth capital by VCs and banks in comparison to RBF. If the company is sold, no sales proceeds have to be given to investors. Existing shareholders, and thus also existing business angels, do not lose any (operational) control over the company or the business model. There is no pressure to grow exponentially or to work towards an exit. Raising new funds is not very labour-intensive, and does not require weeks of contract negotiations and due diligence phases.
Who should be interested in Revenue-based Financing?
In principle, Revenue-based Financing is of interest to all digital companies, regardless of whether they are start-ups, scale-ups or corporate groups, which can demonstrate resilient sales at the time of financing.
And this is what we call a revolution …
Because until recently, non-dilutive financing was only available to large and already established companies, mostly through traditional banks.
With the rise of neofinance and neolenders, Revenue-based Financing in particular is revealing itself as a welcome alternative to raise additional capital, diversify financing sources and therefore profitably enhance working capital or seasonal sales peaks.
And not just on a one-off basis! Permanent Revenue-based Financing also presents itself to many companies as a way to scale long-term growth rates and profits.
SaaS (Software-as-a-Service) and e-commerce companies - not the only example
There’s a misconception that Revenue-based Financing only works for SaaS and e-commerce companies.
At Silvr when we say RBF is interesting for all digital companies, we really mean all of them. Currently, we're still pretty much alone on the floor with this vision - but there's a reason why we're already Europe's leading RBF provider!
As long as there are enough data points for us to evaluate risk and forecast revenue, we will be able to provide you with an offer.
Why are software-as-a-service and e-commerce companies nevertheless hot contenders for RBF?
The answer is simple: Their revenue is often built on a subscription-based business model, and they use numerous digital tools. Both make it easy for us to propose a promising financing offer.
VC-financed companies - we are looking at you, too!
Because, yes, Revenue-based Financing is also worthwhile for you!
For example, in between financing rounds or to improve the starting point for the next one. Or to maximise equity financing and thus your available growth capital.
Did we make you curious? Would you like to know more?
Embrace the possibilities of next-generation financing and take a look at Silvr's products today.
