Flexible funding for e-commerce: revenue based financing

A good funding strategy is a flexible one. Revenue Based Financing is a financing option that gives a business upfront access to future revenue and repayments are tied to the revenues.
June 27, 2022
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3 minute read
Flexible funding for e-commerce: revenue based financing

With the range of funding options available in the market, you should understand and consider carefully which route to pursue.


A good funding strategy is a flexible one.

In this post, we will go through a funding option that is rising in popularity amongst e-commerce companies.

A flexible funding option?

Revenue Based Financing (RBF) isn’t something new, it just didn’t catch much attention until the recent e-commerce boom. It is a financing option that allows small businesses to receive funding that is non-dilutive. This means you are not giving away the ownership of your company and usually a quick decision.

For example, the lender can lend you $500,000 based on your current revenue. You will then make repayments based on a set percentage of your revenues. In short the lender is giving you upfront capital in exchange for a portion of your future revenue.

While traditional financing options like bank loans and venture capital have helped many businesses grow, the terms are usually not that flexible. Banks often require an asset pledge and venture capital eats away your ownership.

Repayments to revenue based financing are tied to your revenues.

A business can be faced with unforeseen circumstances (like economic downturns) or seasonal peaks/troughs. With RBF, the agreed repayment rate will be indexed against revenues, this means businesses will have smaller repayments when they are earning less revenue. The opposite also holds true, when the business is earning more revenue, the repayment will be larger.

In this respect, RBF is not always the “cheapest” option, however it is becoming one of the more flexible options in the market.

Let's contrast this option against traditional fixed bank instalment loans. For an ice cream store that naturally earns less in Winter, having to pay back fixed repayment amounts will put the business under cashflow strain during Winter. Whilst they won't be able to access enough money to fund their growth when they are preparing for peak-seasons.

RBF sounds great? What's the catch?

This finance option is based on existing and predicted revenues. Businesses who are yet to generate revenue or have less than US$10,000 per month in revenue, RBF will be an unlikely option.

But this is where FundFluent can come in handy, we help businesses in all stages of growth to build a flexible funding strategy. (There is no one size fits all funding option, so it's about mixing and matching the options to fit your current stage and growth ambitions.)

Building the business on the right tools stack, will open a lot more funding options for you today, tomorrow and in the future.

We're always happy to chat and learn more about your business - chat now.

3 reasons why RBF might be a better suited option for your e-commerce business

  1. Bank loan processes require heavy paperwork, the collateral requirements are in line with a lack of risk appetite. E-commerce companies are generally not well understood by traditional financial institutions.
  2. Data already exists across your sales, marketing and accounting platforms. This live data should work for you and not against you. Funding should be as dynamic as your business. E-commerce companies can have peaks and troughs in their sales cycle - flexible repayments would be a clear advantage for them.
  3. This option is non-dilutive, you are not giving up any ownership of your company.
       

How to access RBF?

Your data is what will help lenders assess your business and its ability to repay. It’s great if you are already using tools like cloud accounting software, e-commerce and digital marketing tools. These data sources allow lenders to quickly and digitally assess your business. But if not, don’t worry, just ensure that you have your sales, expenses and financial data ready in a structured format.

Why not other options?

While we put the spotlight on RBF in this article, this does not mean all the other funding options should not be explored for your business.  Traditional bank loans, business credit cards, government grants, startup programs and VC funding can all form part of your funding strategy.

We help businesses in all stages of growth to build a flexible funding strategy that reflects their current situation and growth ambitions.

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