Revenue-based financing, also known as royalty financing or revenue sharing, is an alternative debt financing structure. As opposed to term loans with fixed monthly interest payments, monthly payments are based on a percentage of monthly revenue. As a result, payments fluctuate based on the company’s monthly performance.
Due to the structure of this type of financing, revenue-based financing (RBF) is perfect for SaaS companies or other companies who have subscription-based revenue models. Qualified businesses are those with consistent high monthly recurring revenue (MRR) and those with high gross margins. This generally includes early or growth-stage startups such as telecom, platform-as-a-service (PaaS), and software-as-a-service (SaaS) companies. In general, revenue-based financing is used as growth capital, spent on growth initiatives such as marketing and sales campaigns, product development, or hiring more staff.
Revenue-based financing (RBF) is great for SaaS companies as an alternative to traditional bank loans. Small business bank loans often require personal guarantees or collateral, whereas revenue-based financing does not. In addition, a bank oftentimes provides a smaller amount of growth funding than the company actually needs. Although bank loans do have lower interest rates, they are more difficult to obtain.
Venture capital is a form of equity financing and is commonly used among early startups. In exchange for large amounts of growth capital, founders give up equity and control. Revenue-based financing, on the other hand, is minimally dilutive and does not require board seats. Securing RBF can also happen at a much faster rate than the 6-12 months it can take to secure equity financing. Last but not least, even very good SaaS companies may not be attractive to institutional VCs, so there could be a scarcity of equity capital.
In conclusion, revenue-based financing for SaaS companies is a great way to access the growth capital you need that involves no personal guarantees, no board seats, and minimizes equity dilution. With Flow Capital, SaaS companies can raise $1M-7M minimally dilutive growth capital with no board seats and no personal guarantees in as little as four weeks. Instead of securing an investor meeting, companies can submit easy and secure online application forms on the website and will hear back from a member of our investment team within one business day.
For more information about revenue-based financing, read our Founder’s Guide to Revenue-Based Financing.
