For some reason lately I’ve received a ton of calls about revenue-based financing. Most of the callers want to know how it works, and what are the pros and cons of the financing technique. Read on and I’ll try to give a simple explanation of how it works and why a company might consider it as a source of longer-term financing.

Revenue Based Finance is a type of financing structure (credit line) used to finance future subscription revenue in return for a percentage of ongoing gross revenues until a multiple of the original investment is repaid to the investor. It is most appropriate for fast growing companies that generate high monthly recurring revenues, such as SaaS (Software as a Service) companies. Traditional bank loans are not usually available to these companies because of a lack of collateral. As a result, this type of financing is a viable option for high-revenue growth companies that need to finance their growth without diluting current shareholders.

Monthly loan payments are based on a percentage of a company’s monthly gross revenue. If revenues are down from the original baseline, the monthly payment will be less than the baseline payment. If they increase above the baseline, the payment will increase. The credit line typically has a 2-year window to max out, and is then repaid or renewed over the next 3 to 5 years, depending on a company’s needs.

This type of financing is usually put in place for companies that sell a SaaS-based software solution generating at least $100k in monthly recurring revenue (MRR). There is also a requirement that companies maintain a historical renewal rate of 75% or higher.

Ok, so what are the advantages of using revenue-based financing over a Series A, B, or C offering or bank debt?

1. Higher advance rates based on MRR (4x to 8x).
2. Automatic increase in available credit. As revenue grows the credit line grows.
3. Long-term source of capital without shareholder dilution.
4. Capital is available as you need it. No need to go begging shareholders or the bank for additional capital.
5. No balance sheet covenants in most cases (unlike a bank line).

If you are running or managing a SaaS-based enterprise and you are looking for an alternative to expensive venture capital or you were turned down by your bank because you have no viable collateral to borrow against, then give us a call. We can assist you in obtaining up to $15 million in financing to continue growing your successful enterprise.