In tough economic times, is revenue-based finance the more sustainable option for securing capital?

In tough economic times, is revenue-based finance the more sustainable option for securing capital?By Alan Lin, COO and Co-Founder at Outfund

As COO and co-founder at the leading eCommerce investor across the UK, Spain, and Australia, I am well versed in the difficulties faced when you need to secure funding. Many of the startups that we work with have, at some point, stared at the trade-off between sourcing capital and maintaining control. For years, traditional investment models like venture capital would mean giving away equity, thereby diluting ownership, in return for a cash injection. There is also the problem of prevailing bias where a significant portion of venture capital is channelled towards the flavour of the month – in this case companies in the AI space. As a result alternatives, such as revenue-based finance (RBF), have become an even more prominent option for businesses looking to strike the delicate balance between growth and ownership preservation.

The problem of equity dilution

Equity dilution has long been the Achilles’ heel of traditional funding methods like venture capital. While these models do provide the injection of capital needed for expansion, and can offer much needed expertise, they come at the cost of a reduced ownership stake. Revenue-based finance sidesteps this issue entirely, allowing businesses to secure funding based on their revenue, which is then repaid as a percentage of future income. You maintain full equity, thereby preserving your autonomy over strategic decisions. RBF lenders are also better positioned to offer more than just financial support; by analysing customer data they can provide helpful insights and commentary to the companies they invest in.

Repayment tied to revenue

With RBF, your repayment terms are tethered to your revenue and, if your business experiences an unexpected slowdown, your repayments adjust accordingly. This in-built flexibility prevents cash flow crises, allowing you to focus on sustainable long-term growth rather than scrambling to meet short-term financial obligations. The absence of a requirement for fixed repayments, unlike traditional loans, grants you the financial latitude to operate with a strategy that’s truly aligned with your business needs. When revenue increases beyond expectations, repayments are accelerated which, although benefits the lender, reflects positively on your business as it signifies growth. Traditional lenders usually adhere to strict repayment schedules, though there might be room to negotiate a repayment holiday or reduction during challenging times.

Rapid access to capital

Time-sensitive opportunities and cash flow challenges wait for no one. Traditional lending mechanisms can be notoriously slow, with funding rounds that stretch across months or even years. RBF, on the other hand, enables a swifter transaction process, often completing within a matter of weeks, or in some cases, days, all while avoiding the bureaucratic complexities that come with issuing new shares, managing a larger shareholder base, and the dilution of existing equity. The absence of onerous requirements for personal guarantees or collateral further expedites the procedure, making it an ideal tool for businesses that need to act quickly. The speed of the process often comes as a priority for many customers, making it advantageous for the lender to be faster and for the decision maker within the business to have the certainty of an offer on the table to consider.

The risk assessment for RBF can vary as it differs from provider to provider, making it a challenge to generalise across the industry. At Outfund, a blend of traditional and digitised underwriting methods are employed, capturing the best elements of both worlds. This approach ensures that nothing significant is overlooked in the lending process as compared to what a traditional lender would assess, which ensures a thorough yet swift evaluation which aligns with the urgent needs of many businesses.

Safeguard your confidential information

Equity-based fundraising often demands the disclosure of sensitive information, including but not limited to, financial forecasts and product blueprints. RBF streamlines the scrutiny process, focusing primarily on your business’s revenue potential rather than a broader range of internal operations. This more efficient scrutiny is particularly beneficial for companies keen on protecting their intellectual property and maintaining a competitive edge.

Retaining more equity during tough economic times is often more sustainable, and revenue-based finance achieves this by balancing capital access with equity retention, a feat traditional lenders might struggle with. While traditional lenders may offer larger sums and expertise, the flexibility of repayment tied to revenue is a huge advantage for RBF, compared to the rigid schedules of conventional loans. Traditional investment models will always have their place but, if you’re looking to strike that balance between growth and ownership, then RBF might be the better option for you.