Understanding Revenue-Based Financing and How It Works

Revenue-based financing (RBF) is gaining traction in India, particularly among SaaS companies, D2C brands, and tech startups with predictable recurring revenue. This financing model provides an appealing alternative to traditional debt and equity financing, allowing businesses to secure capital without giving up ownership.

Leading platforms like Recur Club are at the forefront of this shift, bridging India’s vast capital gap, which is estimated to exceed $150 billion. According to a study published by Redseer in August 2023, only 30% of digital SMEs' existing $220 billion credit demand is currently being met, leaving immense growth potential for RBF. The market for RBF is projected to reach between INR 130,000 and 196,000 crores by 2025. 

This expansion is expected to complement existing financial products like corporate debt and startup equity, while also introducing innovative funding approaches such as fractional ownership and tokenization. These developments will enable startups to attract investors with lower ticket sizes, fueling their growth more efficiently.

This article examines how RBF works and highlights its benefits for Indian startups. It offers an avenue for growth without the typical challenges of traditional financing methods.

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What is Revenue-Based Financing?

Revenue-based financing (RBF), also known as royalty-based financing, allows early-stage and growing companies to raise capital without giving up ownership. In this financing model, investors provide funds in return for a fixed percentage of the company’s monthly revenue. Repayments continue until a predetermined amount is reached.

Unlike equity investments, RBF does not involve equity dilution, allowing founders to control their companies completely. It offers flexibility, adjusting repayments based on the company’s revenue performance. This makes it especially appealing for businesses with fluctuating cash flows.

Because RBF doesn't require selling shares or altering the ownership structure, it has no impact on the company’s cap table. Entrepreneurs can use this non-dilutive funding to grow while preserving the long-term value of their business.

Who is it Suitable for?
Revenue-based financing (RBF) is particularly suitable for businesses with recurring and predictable revenues, such as Software as a Service (SaaS), subscription-based services, and e-commerce businesses. These companies often experience steady cash flow, making RBF an ideal funding option since repayments are based on a percentage of monthly revenue. Due to RBF's scalability, high-growth companies and startups in the tech, digital media, and consumer goods sectors can also benefit.

Key Characteristics of Revenue-Based Financing

As more founders become aware of non-dilutive financing options, RBF is gaining popularity for its flexible repayment structures. Below are the defining traits that make revenue-based financing a distinctive and appealing funding solution.

• Non-Dilutive Nature 

This financing model allows startups and SMEs to raise capital without giving up ownership or equity. This helps founders retain control and decision-making power, offering a valuable alternative to traditional equity financing.

• Flexible Monthly Repayments  

RBF offers repayments based on a percentage of monthly revenue, not fixed amounts. This flexibility helps businesses manage cash flow effectively, especially during slow periods, by adjusting payments according to revenue fluctuations. The total amount you repay is predetermined as a multiple of the initial funding received (typically ranging from 1.3x to 2x), ensuring clarity on your financial obligations.

• No Collateral or Personal Guarantees  

RBF typically doesn’t require collateral or personal guarantees. This makes it accessible for startups and SMEs with limited assets, removing a significant barrier to securing funding and allowing more businesses to access growth capital. 

Also Read: The Future of Indian Startup Financing: Key Trends to Watch in 2024. 

Example Calculation of Revenue-Based Financing

Here’s a practical example of revenue-based financing (RBF) for an Indian startup leveraging a leading RBF platform, Recur Club:

Example Scenario: A SaaS startup in India generates ₹10 lakhs in monthly recurring revenue (MRR), amounting to ₹1.2 crore annually. The company raises capital to support its marketing and product development efforts. Recur Club, a platform that provides non-dilutive RBF, offers funding based on a percentage of this startup’s annual recurring revenue (ARR).

Calculation:

1. Funding Amount: Recur Club provides up to 50% of the startup’s ARR as upfront capital. The maximum they could raise for this startup would be around ₹60 lakhs (50% of ₹1.2 crore).
2. Repayment Structure: The startup agrees to repay Recur Club 8% of its monthly revenue until it reaches a cap, which might be 1.3x the amount funded (common in RBF). If startups raise ₹60 lakhs, they must repay ₹78 lakhs (₹60 lakhs x 1.3).
3. Monthly Repayment Example: If the startup earns ₹10 lakhs in a month, they will pay ₹80,000 (8% of ₹10 lakhs). In a month when revenue dips ₹8 lakhs, the payment would adjust to ₹64,000.
4. Repayment Duration: The repayment duration depends on the company’s revenue. If the startup consistently earns ₹10 lakhs per month, it would finish repaying the ₹78 lakhs in about 12-13 months. However, if revenue fluctuates, the repayment period may extend accordingly.

The RBF model offers the flexibility to manage repayments according to the company's performance, making it particularly useful for startups with variable income like SaaS businesses. It allows them to access capital quickly without giving up equity, making it a founder-friendly option​.

Calculate Your Revenue-Driven Financing Potential in Seconds! 

Recur Club offers an innovative financial tool called “Estimate Your Funding,” or the Revenue Calculator. It enables startup owners to swiftly estimate the capital they can raise based on their Annual Recurring Revenue (ARR) and repayment terms. 

This tool provides businesses with immediate insights into how much funding they can access, the repayment structure, and the potential duration, making it easier to plan for growth while maintaining financial flexibility. Feel free to let me know if you need further adjustments!

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How Does Revenue-Based Financing Work?

Revenue-based financing (RBF) allows businesses to secure upfront capital by offering investors a percentage of their monthly gross revenue as repayment. Unlike traditional loans with fixed monthly payments, RBF adjusts according to earnings, typically with a rate ranging from 5% to 10%. 

This flexible repayment model makes RBF ideal for managing working capital gaps, especially in industries where upfront investments in inventory, vendors, or marketing are required before revenue is generated.

As revenue grows, repayment accelerates, which can increase costs if growth is rapid. However, the investor and the business are aligned in their focus on revenue growth, as both benefit when the company performs well.

RBF agreements generally have defined repayment terms, ranging from short-term (less than 12 months) to longer-term (up to 60 months), ensuring investors recoup their funds while businesses maintain flexibility.

RBF in India 

Platforms like Recur Club have transformed how subscription-based businesses and those with recurring revenues access non-dilutive capital. Recur Club offers financing ranging from ₹20 lakhs to ₹35 crores, with returns typically between 15% and 19%. These figures vary depending on the specific business and investor terms. 

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Recur Club offers non-dilutive, fast-access capital solutions tailored for startups and growth-stage companies in sectors such as SaaS, Manufacturing, Gen AI, CleanTech, EV, IoT, Health Tech, Marketing Services, and D2C. The fin-tech platform has played a significant role in helping Indian startups leverage revenue-based financing (RBF) to fuel their growth while retaining ownership. 

One notable example is InCruiter, a Bengaluru-based HR-tech startup that secured ₹1 crore through Recur Club. The startup, which offers Interview-as-a-Service solutions, used the RBF capital to expand its operations into international markets, including the US, Canada, and Dubai, and to hire additional talent for tech and sales​.

How are RBF and Traditional Financing Methods Different?

Revenue-based financing (RBF) has carved out a niche as a refreshing alternative to traditional financing methods like equity, debt, and venture capital. While each method has pros and cons, RBF sets itself apart with its "pay-as-you-earn" approach and equity-friendly terms, allowing businesses to keep their ownership pie intact.

The table below compares various funding models, showing how RBF stacks up against traditional financing options.

What are the Benefits and drawbacks of Revenue-Based Financing?

RBF offers an efficient solution for businesses with predictable income and a need for flexible funding. However, startups must consider the following balanced assessment of the benefits and drawbacks of this widely adopted financing alternative:  

Benefits:

• Maintain Cash Flow: Repayments align with revenue, adjusting lower during slow months, easing cash flow management.
• No Large Payments: Payments are based on revenue percentages, increasing in good months and decreasing in slower periods.
• Quick Funding: Faster approval compared to traditional loans, often within days, ideal for urgent capital needs.
• Growth Alignment: Investors are incentivized to support business growth as repayments depend on revenue performance.

Drawbacks:

• Revenue Requirement: Best suited for businesses with consistent and growing revenues; pre-revenue startups may struggle to qualify.
• Monthly Payments: Obligations persist monthly, which can be difficult during extended periods of low revenue.
• Smaller Funding: Typically offers lower amounts than venture capital, limiting more extensive funding opportunities.

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Steps to Secure Revenue-Based Financing

Securing revenue-based financing (RBF) involves key steps to ensure you get the right funding for your business. From evaluating your eligibility to selecting the ideal provider, following these steps will help you unlock flexible growth capital while maintaining control.

1. Define Capital Needs and Growth Goals

• Determine How Much You Need: Identify the specific amount of capital required for growth, including areas like marketing, product development, and hiring.
• Create a Growth Plan: Explain how the funds will fuel growth and lead to increased revenue.
  

2. Prepare Financial Forecasts and Address Risks

• Develop Revenue Projections: Create realistic financial forecasts to show expected revenue growth.
• Highlight Risks: Identify potential risks and demonstrate how you plan to handle them to reassure investors.
  

3. Find the Right RBF Provider

• Compare Providers: Look at different RBF platforms, their terms, and how well they match your business needs.
• Choose the Best Fit: Pick a provider whose terms align with your growth strategy.
  

4. Understand the Terms

• Review Repayment Terms: Ensure the percentage of revenue you’ll repay fits your cash flow.
• Check Other Conditions: Look for any extra terms, like warrants or funding clauses, that might affect control over your business.
  

5. Evaluate Financing Terms Carefully

• Follow the 33% Rule: Make sure your debt doesn’t exceed 33% of your annual revenue.
• Ensure Repayment Capacity: Confirm that your profit margins can comfortably handle repayments.
• Avoid Equity Warrants: Prefer agreements without equity-related clauses unless they suit your long-term goals.
  

6. Use Funds to Acquire and Retain Customers

• Boost Marketing: Use the funds to enhance customer acquisition through targeted marketing and loyalty initiatives.
  

7. Expand and Innovate

• Invest in Product Development: Allocate part of the capital to improving products and exploring new markets or partnerships.
  

8. Monitor Your Performance

• Track KPIs: Continuously monitor your performance and ensure you stay on track with repayments and growth targets.

At Recur Club, we help you find the right lender for your business and negotiate the best debt offer for your cash flow.

If you're looking for a streamlined way to access revenue-based financing, Recur Club offers a straightforward process tailored to your needs.  

• Sign Up and Link Financials: Create an account and connect your business’s GST and bank statements to assess revenue.
• Revenue Assessment: Recur Club analyzes your financial data to evaluate your revenue, growth, and cash flow, determining your eligible funding amount.
• Receive Term Sheet: Within 48 hours, you'll get a term sheet outlining the proposed funding and repayment terms.
• Accept and Receive Funding: Upon agreement, Recur Club disburses capital (up to 30% of ARR) in a few days.
• Flexible Repayments: Repayments adjust based on monthly revenue, offering flexibility during slower months.
  Now that we have the steps to securing revenue-based financing let's address some common questions to help clarify any remaining doubts about this innovative funding model.

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FAQs 

1. RBF is suitable for which startups?

Startups with stable and recurring revenue streams and immediate capital needs are well-suited to RBF. This includes Software as a Service (SaaS), subscription-based services, D2C, and e-commerce businesses. Startups with 6-12 months of revenue history and healthy gross margins are well-positioned for RBF as growth capital.

2. Why You Must Choose Recur Club for Revenue-Based Financing?

Recur Club funds recurring revenue streams like SaaS, media, fintech, and health tech. Their AI-driven model assesses key metrics like customer lifetime value and churn. With no equity dilution, founders retain control, and a clear fee structure ensures transparency in repayment terms.

3. What Is A Revenue-Based Financing Term Sheet?

An RBF term sheet outlines the loan amount, fees, repayment period, and remittance rate (typically 5%—20% of monthly revenue). It details loan costs, early repayment terms, and the percentage of eligible sales revenue used for repayment.

4. Are There Any Tax Implications Associated With Revenue-Based Financing?

According to Invest India, revenue-based funding is a form of debt; therefore, the interest payment on the investment is ‘tax-deductible’ for businesses.

5. How Is The Revenue Shared Between Investors And Businesses?

Startups using revenue-based funding repay the principal plus a fixed fee, usually 4%—8% of monthly revenue. Payments are based on a set percentage of income (e.g., 5% of INR 1 Cr sales would mean a fee of INR 5 Lakh until the loan is repaid).

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The Takeaway

In conclusion, Recur Club’s approach to revenue-based financing offers a balanced and founder-friendly alternative to traditional loans and equity financing. It combines quick access to capital with repayment terms that adjust to the ebb and flow of a business’s income. 

Recur Club offers up to 50% of a business's annual recurring revenue (ARR) as upfront capital, targeting SaaS and subscription-based companies with predictable incomes. With a data-driven platform that matches startups with investors, the platform provides up to ₹20 crore (USD 2.4 million) without equity dilution or collateral. Repayment is flexible, adjusting with monthly revenue over a 6-24 month term, making it ideal for businesses with fluctuating sales.

If you find the entire process challenging or complex, we are here to provide expert guidance and support every step of the way. Connect with experts at Recur Club today!