Updated: Nov 22, 2022
You may be familiar with the term Revenue-Based Financing(RBF) by now but within the last year or so, revenue-based financing has evolved into a business financing product that is offered to startups with monthly recurring revenue(MRR). Seeing the recent influx of financing companies entering this niche space is a bit surprising given that RBF is often used interchangeably with Merchant Cash Advance, Business Cash Advance, and Sales-Based Financing. To some, revenue-based financing may seem like a unique financing product but its variations are really part of the evolution of the merchant cash advance(MCA) product.
What is revenue-based financing?
There isn’t one clear definition of revenue-based financing but most companies and other sources have the main components correct. RBF is providing capital to a business, for a fee by a factor rate, based mainly on its future revenue and is paid back by a percentage of its sales either daily, weekly, or monthly. RBF may have a longer term length and payment structure than a typical MCA, with some offering expected term lengths as long as 5 years with monthly payments.
The expected part is the key as the payments fluctuate based on the actual sales of the business during the contracted time period. So when sales increase the payments are higher and when they decrease the payments are lower. This helps business owners manage these times more effectively than a fixed payment amount.
How is RBF different from an MCA?
The way companies are using the terminology the differences are minimal. The one main point may be that MCAs have been for years mostly using a fixed payment amount whereas originally it was a split of the percentage of sales from the credit card processing. RBF products are mostly using a split percentage from the relevant business bank or processing accounts.
MCAs take into account all true sales from business bank accounts and credit cards unless doing a split only from the processing account that a merchant has on their platform. There are some companies that state that RBF is also taking into account all sales and that's why it is different than an MCA but as previously mentioned that is what MCAs already do. All sales from all accounts should be included in an MCA or RBF to provide the full scope of the business which should help everyone.
RBF for startups
Essentially the original merchant cash advance has evolved into multiple variations and structures. There are now several companies that are marketing their RBF product to startups. They include Capchase, Pipe, and Founderpath. They are positioning the product as a good non-dilutive alternative to venture capital or venture debt. Saas and other tech companies are the main target audience where they can turn monthly recurring revenue into flexible growth financing.
There are other lenders that provide a similar product but in a different niche, such as E-Commerce funding platforms and Gig economy funding platforms. Though they may have a hard time keeping up with some of the bigger players like Amazon, many of these companies are able to offer a fast level of service with certain advantages and fair pricing. They can do this the way many commercial finance lenders do which is by using bank verification software that links a merchant's account to allow that lender to analyze the bank activity in minutes. It also allows the lender to stay connected to their account so they can offer renewals as soon as possible and be aware of any issues that may arise.
All of these variations of financing products are a plus for entrepreneurs overall because it gives them more options without having to relinquish more equity. As technology changes as well as laws specifically targeting commercial finance, there will be more variations in the future.