What is "Revenue based Financing"?
Revenue-Based Financing (RBF) is a funding method where investors provide capital to a business in return for a percentage of its profits. The Investors receive profits directly in percentage proportion to their investments. This share is proportional to the amount invested, making it different from traditional loans or equity financing.
If the total cost of a project is ₹100 lakhs and an investor contributes ₹20 lakhs—representing 20% of the total investment—then upon completion of the project, the investor is entitled to receive the original ₹20 lakhs as principal, along with 20% of the project’s total profit. For instance, if the company earns ₹30 lakhs in profit, the investor would receive ₹6 lakhs as their share of profits, resulting in a total pay-out of ₹26 lakhs. The investor’s returns are directly proportional to their investment share. If the investor financed 20% of the project, they earn 20% of the total profit.
This structure ensures the investor’s returns are directly proportional to their investment, without requiring equity dilution or fixed interest payments, and their benefit scales with the project’s success.
It’s an alternative to traditional loans or equity financing, often used by businesses with consistent revenue streams or in short term projects where revenues are expected to come within short periods. RBF is particularly useful for businesses with steady revenue streams, such as SaaS companies as it allows them to secure funding without sacrificing equity or taking on rigid debt obligations.
Investor Return in RBF: Proper Perspective
Scenario
- Total project cost = ₹100 Lakhs
- Investor contribution = ₹20 Lakhs (i.e., 20% of total cost)
After Project Completion:
Let’s say the company completes the project and earns a total profit of ₹30 Lakhs.
Investor’s Returns:
- Principal Returned: ₹20 Lakhs
- Profit Share: 20% of ₹30 Lakhs = ₹6 Lakhs
- Total Payout to Investor: ₹20 Lakhs (principal) + ₹6 Lakhs (profit share) = ₹26 Lakhs
It’s often seen as a hybrid between traditional debt and equity financing. Unlike traditional debt financing, RBF does not involve fixed interest payments or collateral requirements.
The Typical process flow of the RBF involves the following:
- Investment Agreement – The business receives upfront funding from investors in exchange for a share of future revenues.
- Revenue-Based Repayments – In Short-term projects, the investors are paid back in full, along with profits proportional to their investment immediately after completion of the project. And in Long-term projects, the Repayments are made regularly based on a fixed percentage of the company's monthly revenue.
- If the project is a long term, the company makes regular payments based on a fixed percentage of its monthly revenue.
- Aligned Interests – Investors benefit when the business grows, creating a shared incentive for success.
- No Fixed EMIs or Interests - There are no fixed monthly payments or interest obligations to the Company. Repayments scale with revenue, offering financial flexibility.
- Higher Profits for the company means higher returns for the Investor & vice-versa.
- No Equity Dilution – Unlike venture capital, investors do not take ownership in the business.
Why RBF Is Attractive
- Flexible Repayment: Payments fluctuate with monthly revenue performance, easing financial pressure on the business.
- Faster Access to Capital: Compared to traditional debt or VC funding, approvals are quicker and less complex.
- Ideal for Predictable Revenue Models: Especially suited for SaaS, e-commerce, or subscription-based businesses with recurring income.
- Shared Incentives: Both investor and company prioritize revenue growth, creating a win-win alignment of goals.
- No Collateral Needed: There's no requirement for fixed interest or asset-based security.
In essence, RBF is a hybrid model, blending the flexibility of debt with the fairness of equity—but avoiding the rigidity of fixed repayments and the dilution of ownership.