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iNSIGHTS

Why eComms should be using revenue-based finance for growth

June 29, 2022

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One thing is clear: traditional financing doesn’t fit eCommerce businesses looking to grow.

Loans, overdraft facilities, and invoice refactoring offered by conventional providers like high street banks can help but aren’t agile or flexible enough to match the seasonality and needs of fast-moving SMEs selling online. 

Take the above, combine it with rising interest rates and a looming recession and you have a particularly tough climate for eCommerce and online businesses still looking to access the right funding to scale.

Enter: Revenue-based financing.

An increasingly popular choice for digital businesses, revenue-based financing is built for those looking to level up to the next growth stage without giving up equity or control. It’s designed to fund short-term growth activities that will get your business a quick return on investment (like marketing and inventory) and flex with your business in a way traditional financing can’t. It’s not only a form of financing but a growth tactic to reach ambitious targets. And with the structure of repayments linked to performance, it can grow alongside your business. Read on to understand the value of using revenue-based finance to propel your eCommerce or digital business forward.

The six growth features of revenue-based financing

1. Speed

The speed of access to revenue-based finance is unmatched compared to other funding options, meaning you can act quickly to maximise growth opportunities. 

The use of digital applications, analytics and open banking allows revenue-based finance providers to quickly understand your business and build a tailored offer. Compared to a high-street bank, where an offer can take weeks, you can expect the average time from initial application to funds in your account within 48 hours. Forget spending your time on lengthy paperwork, pitch decks or business plans: focus on running the business and pounce on growth opportunities knowing you’ll have the funding in your bank in a few days. This is particularly advantageous when planning for specific holiday and sale seasons. Think Valentine’s Day, Spring Bank Holiday, and Black Friday: all great opportunities to dial up the marketing spend and ensure you have the stock to fulfil orders. 

2. It's flexible and fair

One of the most attractive characteristics of a revenue-share model: the flexibility. Rather than an interest rate, revenue-based financing charges a single flat fee agreed on upfront. This can be repaid as either fixed payments or tied to a percentage of future incoming revenue, helping you to grow with confidence by minimising risk. Take an outdoor furniture company, for example. You may experience a seasonal boom during Summer, with slower sales during winter, making it difficult to optimise your cash flow during these months. Revenue-based finance is built to match the ebbs and flow of your business, with your percentage of payments lower during the seasonal lulls, giving you the reassurance to seize growth opportunities when they arise.

Fee aside, revenue-share models have fairness baked into their nature. There are no arrangement fees. No late payment penalties. No hidden fees. Instead, you can accurately understand your ROI on stock or ROAS on ad spend with the agreed-on flat fee.

3. It's non-dilutive and cheap

Gone are the days of giving up equity in exchange for funding. Revenue-based financing has revolutionised the way SMEs can grow, with no loss of equity for founders and directors. Compared to the cost of giving away equity or the interest rates banks offer - it's much cheaper too.

Although equity investment is an important part of the finance stack for mature businesses looking to tackle long-term strategic initiatives, founders no longer need to give up equity and control just to provide the company with an injection of cash for short-term activities. Without the reliance on VC funding, this means more control over the company and its direction in the earlier days.

4. You can access larger limits based on future revenue, without security

With revenue-based financing, providers care more about where your company is going instead of where it’s been. In practical terms, this means that your business performance is forecasted to build an offer. So if you’re growing, you can borrow larger sums of money than traditional forms of finance, which rely much more on historical data.

Overdrafts, credit cards, and facilities can come with security requirements such as personal collateral or have much smaller limits. With revenue-based financing, you’re looking at advances up to £1M per tranche, making it great for bulk buying stock and scaling proven campaigns. 

5. It's helps build traction and opens doors to advanced funding options

The injection of working capital revenue-based financing provides is great to prove the scalability of your business model. Trialling and understanding your best acquisition channels and ROI is crucial for unlocking more advanced funding in the future. For example, if you’re a younger business that has only been trading for 12 months, you might be testing new products, stock lines, and marketing campaigns. 

Revenue-based finance works great in a finance stack as a short-term working capital solution and complements other funding sources well. At Forward Advances, we have seen a number of our businesses grow using revenue-based financing before accessing venture capital or crowdfunding a short period after. Take premium bedding company Bedfolk, for example. In 2020, Bedfolk used our funding to find and expand new growth channels, resulting in a 33% increase in monthly sales. Bedfolk’s growth didn’t go unnoticed and the following year was able to secure further Seed funding.

6. Top-ups are available throughout the year

Working capital, by definition, needs to be constantly replenished, and we understand that. Revenue-based financing is not a one-off deal, but a longer-term relationship, supporting recurring costs like ad spend and paying suppliers. 

Revenue-based financing grows with your business. If a new product line you’ve been testing takes off quicker than expected and needs another cash boost to grow even further, that can be arranged seamlessly at the speed of your growth.

Ultimately this gives you more time to focus on the business and its growth instead of wasting time having to jump through unnecessary hoops and bureaucracy. 

How it works in practice

We’re proud to have helped a number of eCommerce businesses rapidly grow without giving up equity, like Bedfolk and ChargedUp.

Founded by husband-and-wife team Nick and Jo James, Bedfolk simplifies the bedding purchasing experience. By offering the best bedding essentials on the market at a price that doesn't break the bank. Bedfolk has focused on building a world-class product and brand.

After taking an initial advance with Forward Advances, they needed the right team and technical structure to scale without sacrificing their strong customer economics. 

Bedfolk used revenue-based financing to launch two new channels, leading to a 43% increase in new customers, while the cost per acquisition stayed under target. (Read the full story here.) They also achieved a 33% increase in monthly Gross Sales, and the business made over 2x year-on-year sales. 

Another business that has used our funding to scale, is ChargedUp. Created by Hugo Tilmouth, ChargedUp offers users a network of easy-to-access power banks across venues, pubs and stations across the country. When the pandemic hit, the company leveraged their vast network of clients and pivoted to create hand sanitiser stations, known as CleanedUp

At Forward Advances, we helped them access revenue-based financing to fund this product innovation. Within three days, they had a new prototype along with 150 customers signing up to buy it. With new government regulations stating that every pub must have a hand sanitiser, the business grew rapidly and now has Transport for London (TfL), Leon, Costa, Hilton and Holiday Inn as customers. 

Since there was such an immediate demand to scale the business rapidly, CleanedUp needed fast, flexible access to capital. With a positive ROI and a fast-growing business, traditional funding routes felt outdated, clunky and simply too slow. The company needed to increase inventory and stock spend, quickly scale the business and meet surging demand. (Read the full story here.)

Now, it’s your turn to grow

If you’re an eCommerce, marketplace or mobile app business looking to take your business to the next level, see how much you could borrow here.

If you’d like to learn more about how revenue-based finance could work for you, book a call with one of our funding experts to discuss your options. 

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