March 30, 2022

The Complete Guide to Revenue-Based Financing

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2020 was the year the world went digital. 9/10 global eCommerce companies saw double-digit revenue growth as consumers were forced to abandon the high street and turn to online purchases to meet their needs. In other words, if you are an eCommerce business, the likelihood is that you will have had a noticeably strong year – and will be set to continue this success into the post-pandemic era. This digital revolution has showed no sign of slowing as the global economy recovers.

Whether you’re an established eCommerce business or a brick-and-mortar seller that recently transitioned to online, how do you capitalise on this momentum to propel your business to new heights?

There are plenty of ways to attract new customers and boost sales, from online advertising, influencers, and automated mailers. But regardless of whether you’re investing in inventory ahead of a marketing campaign or upgrading your site in anticipation of a big launch, there is one thing you need in order to seize the opportunities available to you and supercharge your growth: the right financing.

Financing an eCommerce business

At Forward Advances, we see that many eCommerce companies face two key financing challenges that hold them back from reaching their business goals.

  1. Driving demand: you have nailed your core product but you’re not achieving your sales potential. Why? You haven’t invested enough into your marketing to drive brand awareness and demand and you lack the capital to really build momentum.
  1. Supplying demand: You want to invest in new stock before your existing stock runs out. Or you’ve had an unexpected sales surge for one of your products and demand is through the roof. Great news, right? It would be – except your stock is running dangerously low and you don’t have the necessary cash reserves to get more in.

Sound familiar? While these problems are frustrating, they can be easily resolved with the right funding, used wisely.

Ways to fund an eCommerce business

While there are a wide range of financing options available for eCommerce businesses, choosing the right option – based on your company’s specific needs and lifecycle stage – is critical if you want to maximise success.

Let’s take a look at the financial products that are out there and how to choose between them.

Venture Capital: Venture capital (VC) is a form of financing where capital is invested into a company, usually a start-up or small business, in exchange for equity in the company.

Traditional bank loan: If approved for a traditional bank loan, a bank gives you a lump sum of cash in exchange for making monthly payments over a set term, with a fixed or variable interest rate over the life of the loan.

Merchant Cash Advance: A Merchant Cash Advance (MCA) isn't really a loan, but rather a cash advance based upon the credit card sales deposited in a business' merchant account. This means that a merchant does not owe any funds until they generate sales.

Revenue-based financing (RBF): RBF is a short-term finance solution to boost revenue and growth through inventory or marketing. RBF is designed to be flexible to accommodate for business peaks and troughs, as the advance is repaid using incoming revenue. Unlike other finance types, RBF is equity-free and does not require any personal guarantees or collateral.

Key considerations when choosing an eCommerce finance provider

When considering any financial product for your business, take note of the:

Ease of Access: Do you have the trail of bank statements and positive credit history to pass the strict underwriting system used to approve traditional bank loans?

Available Capital: How much capital do you need to meet your business goals at this particular moment? Are you chasing hyper-growth or simply looking to boost sales?

Cost: Easy access tends to come at a high price. How tight are your margins? Can you afford to pay high fees down the line?

Accessing capital via traditional sources such as high street banks often require small business owners to be prepared to put up their own assets as guarantees against the loan, or accept high interest rates.

At the other end of the spectrum, VC isn’t right for every business either – despite it often being put forward as the most desirable option. Many VC funds aim to pick companies either with the potential to generate tenfold returns, or to go public in 10 years – a pretty narrow group.

Why is revenue-based financing so popular?

Revenue-based financing (or RBF) is an immensely versatile financing option with flexibility baked into its nature. While traditional bank loans or invoice financing agreements require a fixed sum to be paid back every month, the major advantage of RBF is that businesses pay back the loan, and interest, via an agreed percentage of their daily or monthly sales. It gives companies short-term cash injections for a clearly defined purpose, like marketing costs or inventory purchases.

Unlike other types of financing, with revenue-based financing there is no equity participation (i.e., you don’t give up any ownership in the business), personal guarantees or hidden fees involved. It’s fast too: the instant cash structure allows founders to act on immediate growth opportunities, instead of going through the lengthy process of raising funds through equity-based investment. 

What’s more, when a business has found its product-market fit and is generating repeatable, predictable revenues, because RBF underlines revenue growth it can be an efficient way to boost your valuation before a forthcoming VC round.

How does revenue-based financing work?

The key advantage to revenue-based financing is flexibility. Rather than becoming a fixed business cost every month, you pay the total amount back over time as a percentage of your revenue. In other words, if your revenue goes up, so do your payments, and if you’re having a slow sales month, your payments go down. For an eCommerce business, this offers invaluable flexibility. At Advances, we charge a simple fixed fee so there are no surprises or penalties should it take longer to pay back than anticipated. We break it down and show you how it can help you grow your business faster below.

Scenario 1

It’s November. Black Friday is coming up and you decide to invest £100,000 in inventory, advertising, and PR to make the most of consumer momentum. The investment pays off and you have a month of smashing sales targets – but then everything goes quiet. If that £100,000 had come from a traditional bank loan, you would be hit with high payments just after Christmas, a notoriously slow period. With revenue-based financing, payments reduce with your revenue, meaning that you can take advantage of growth opportunities without the resulting pressure

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Scenario 2

It’s a quiet month for sales after a busy period. You’ve lowered your budgets accordingly – but then one morning you wake up to find that your website traffic has spiked. You discover that one of your products have been featured in Grazia and influencers are picking it up on social media. You want to take advantage of the unexpected PR, so you apply to an revenue-based finance lender for funds to put towards digital marketing and inventory. Because your marketing data and banking information looks solid, your application is approved in 24 hours. You launch a targeted promotional campaign across Google and Facebook to make the most of the interest and put in an order with your supplier to make sure you don’t run out of stock, anticipating higher sales volumes to continue. Revenue-based financing gives you the confidence to invest, knowing that should your sales slow, you’ll be able to meet the repayments.

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How the revenue-based financing application process works

At Forward Advances, we use the latest technology to assess your business and build our funding offers. Rather than relying on outdated credit score metrics in our underwriting, Open Banking enables us to take cash flow into account. All of this creates a comprehensive picture of a business’ future trajectory and that means we can build a great offer for a company based on the best data possible.  You can read more on this in our 'Applying for Revenue-Based Financing' article.

Is revenue-based finance right for your business?

But how do you really know if RBF is the right financial product for your business? Let’s look at the pros and cons of revenue-based financing.

Pros:

  • Retain control: RBF allows you to fund growth without diluting equity or giving up a board seat; it leaves decisions and ownership entirely to the founder.
  • Quick capital: RBF is approved on a much more flexible standard than traditional bank loans and sometimes in as little as 24-48 hours – very useful for short-term cash flow needs. Approval is data-driven, largely related to unit economics and projected income, and doesn’t require a specific personal credit score.
  • Data-led process: Many of the lenders offering RBF have developed sophisticated platforms which make the whole process of applying for funding, both remarkably swift and tech-driven. These platforms utilise in-built analytics to make data-driven decisions on whether to award a loan - thus reducing the propensity for human bias - and what level of capital might be most suitable.
  • Payments reflect revenue: As previously mentioned, the loan repayment flexes depending on monthly revenue.
  • No personal collateral: RBF doesn’t require a personal guarantee as collateral against the loan, so you don’t have to risk any of your personal assets.
  • Investor support: Because when your revenue is higher, your payments are higher, your investors are particularly motivated to help you succeed – but without any pressure to sell (RBF investors don’t gain from the sale of a company).

Cons:

  • Limited availability: Some RBF providers look at average monthly revenue to underwrite and give an offer. In this scenario, RBF would only be suitable for companies with a history of bringing in relatively steady revenue from month to month. RBF is also only suitable for short-term activities that can provide a boost in revenue and therefore, repaid quickly such as marketing and inventory. 
  • Lighter capital: Amounts secured through RBF are traditionally smaller in size than VC financing so ensure that the amount matches your ambitions for the company before you apply.
  • Usage limitations: Some providers will limit what the capital is to be spent on either through a prepaid debit card that is restricted to certain types of activities (such as Google AdWords) or by paying invoices directly on your behalf. This is not a disadvantage, per se, but make sure that both sides are clear on how you intend to use the loan, and any terms and conditions of approval.
  • Weekly payments: If your revenue is relatively steady, flexible weekly payments are a great financing option. However, if you are yet to start selling your products or services or are looking to get out of operating at a deficit, RBF won’t be an appropriate choice.

Choosing a revenue-based finance lender

The growing popularity of revenue-based financing has made it an increasingly crowded space, making it more important for businesses to choose the right lender, especially in specialised markets such as e-commerce where certain providers have more expertise than others.

Some revenue-based providers (like us at Forward Advances) act as business partners as well as lenders, actively supporting a company to help them make the capital work harder for them. This is often through adding additional business intelligence or consulting services on top of the advance, such as helping to pair the company with marketing analytics or inventory specialists. These experts can analyse the current marketing performance and look at how the company can negotiate better deals with its suppliers, for example.

Shop around for bundled services and look for a partner with relevant industry expertise and a data-driven approach to help you achieve the highest possible return on investment.

For a complete checklist of questions to ask and what you need to consider when selecting a provider, download our revenue-based financing checklist here.

Interested in revenue-based financing with Forward Advances? Let's chat. See how much you could be eligible for here in less than 5 minutes.

Image from StratfordProductions via Adobe Stock.

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