First, the basics when considering business capital options: It’s easier to get a handle on cash flow than ever before, and that means you can make accurate projections about your revenue going forward. The problem is that having money locked up in future earnings prevents you from being able to capitalize on it today.
This is where revenue based financing comes into play. The concept is simple; you can upfront your revenue and access cash right now, rather than being left in limbo until months down the line.
The benefits
We’ve already mentioned the main benefit of receiving financing based on future earnings; that being your receiving of early access to cash and thus having the opportunity to put it to work right away.
The other big selling point of this type of package is that it requires no dilution of your equity. Whereas investors will usually want to take their piece of the pie and also exert some degree of control over your startup when they agree to fund your growth, with financing that’s predicated on projected revenues, you’ll retain total ownership of the business.
In addition, there’s a degree of flexibility to most packages, so even if your revenues fluctuate, you won’t be left with an arrangement that suddenly becomes unaffordable. As such there’s no need to be concerned about unforeseen risks, because there aren’t any.
The applicable industries
The advantages of RBF aren’t limited to any one industry or sector, so whatever niche your startup is aiming to dominate, you can consider this capital option closely.
The tech industry has become a particularly fierce proponent of this form of financing, with startups in the cloud software space being especially eager to leverage it. This is partly because they face higher costs from the offset, and so need more capital at their disposal to realize their ambitions.
The suitable contexts for use
Generally speaking, startups in the very early stages of their development are best suited to RBF. This is because it can form a foundational part of the bootstrapping process; namely, it means you can upfront your revenues which you anticipate earning and harness them for growth, while also avoiding being overly reliant on your own capital to fund your business.
The days in which small organizations are built on the backs of founders putting their own money on the line, or the cash of friends and family, are definitely not behind us. However, for those who don’t have this type of support network to call upon, and also are eager to resist the temptation to dilute their equity with outside investment, RBF is the obvious choice.
Final thoughts
Being hasty about considering business capital options is never a good idea, especially as it could lead you to overlook compelling alternatives to traditional funding such as revenue based financing. It may take a little time to get to grips with what this particular funding concept has to offer, and it’s certainly not ideal in every circumstance. However, if it meets your needs and business goals, it is worth exploring further.
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