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Start-up Revenue-Based Financing for Sustainable Growth: A Complete Overview

By Annapoorna

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Updated on: Dec 22nd, 2022

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3 min read

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Startup revenue-based financing allows royalty-based financing through which a startup enterprise receives loans/funds from investors in exchange for a share in future revenues. This form of finance provides combined benefits for both equity and debt financing. In this article, we will discuss the benefits of revenue-based financing for startup companies.

1. Effective mode of financing

A start-up usually has a low credit score or does not have any credit history. Due to this, these companies find it difficult to sanction business loans from any bank or financial institution. Revenue-based financing has relatively lesser prerequisites which help a startup avail these loans. This helps them meet their working capital requirements and facilitate their sustainable growth.

2. Less risky

Under revenue-based financing, entities are not required to place collateral. A start-up, by nature, has low-valued or lesser assets with them. This helps a startup availing revenue-based financing without risking their ownership of assets. There is no dilution in ownership of these start-ups, which helps the founders maintain control over the company and direct its financial and managerial decisions.

3. Flexibility in repayments 

Revenue-based financing repayments are based on the entity’s future performance. Interest under revenue-based financing is a percentage of future revenues. Typical startup companies have lesser revenues during their growth stage. This form of financing protects these companies from a fixed rate of interest provided under traditional financing like bank loans. Hence, a startup can manage its working capital effectively. 

4. Transparency

The returns under revenue-based financing depend on a company’s future growth. Hence, an investor will require correct financial data from the borrower to measure the return on investment. A startup is required to maintain accurate data, which helps the investors have a clearer idea about the repayments.

5. Repayment cycle

Under traditional financing, the repayment schedule is fixed and stringent. Any default in repayment of interest or principal can lead to the seizure of assets or penalties on the company. While in revenue-based financing, the repayment cycle is directly related to the company’s growth. For instance, if there are higher sales, the repayments to the investor will increase proportionately, thereby decreasing the tenure to repay the loan and vice versa. Hence, a startup doesn’t have to worry about paying off its debt, and this allows them to grow organically.

Conclusion

Revenue-based financing is one of the best financing options for startups since they are having a low credit history, and it would involve lower risks.

About the Author

I preach the words, “Learning never exhausts the mind.” An aspiring CA and a passionate content writer having 4+ years of hands-on experience in deciphering jargon in Indian GST, Income Tax, off late also into the much larger Indian finance ecosystem, I love curating content in various forms to the interest of tax professionals, and enterprises, both big and small. While not writing, you can catch me singing Shāstriya Sangeetha and tuning my violin ;). Read more

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