The following is a guest post by Carlos Antequera, CEO and Co-founder of Novel Capital.
Balancing capital costs can be tricky for startups seeking new investments.
Leveraging personal assets to secure a bank loan is risky, and surveys show that venture capital firms accept less than one percent of investment opportunities.
What’s more: VC investments fell to a nine-quarter low in the third quarter of 2022.
Revenue-based financing is a compelling alternative for entrepreneurs looking to overcome these challenges.
Revenue-based financing (RBF) is a unique solution that allows Founders to leverage their predictable revenue for access to non-dilutive capital. As you grow, so can the amount of capital you can access. If company growth is top of mind, read on for the unique benefits of revenue-based financing.
1. Revenue-based financing lets you accelerate quickly
With revenue-based financing, the turnaround time on investment decisions tends to be faster than venture capital. This can mean getting the funding you need in days, not months.
Say your startup has found an initial product-market fit and is starting to gain traction. Now’s the time to expand your marketing department and get the word out. Your product is ready, and you don’t have time to waste.
Or maybe you anticipated your product coming to market, and your campaign is already drawing interest. Now you need to expand your sales team. And if your sales team is already selling at scale? You’ll need new staff to support your new customers.
Revenue-based financing lets you deploy capital more quickly than other funding sources, meaning you can respond to your company’s particular needs as they arise.
Additionally, some revenue-based financing payback models adapt to seasonal or cyclical cashflows, meaning you don’t have to slow down your growth because revenue ebbs and flows.
2. Revenue-based financing is based on what you’ve achieved
You’re generating revenue. But even with this success, you may not yet be profitable.
Revenue-based financing is algorithm-based and available to anyone with increasing, predictable cash receipts. This offers you an advantage – your funding is a product of your accomplishments, not a mortgage on your future.
Unlike traditional bank loans, RBF doesn’t typically come with personal guarantees or credit checks. Financial covenants tend to be reasonable (if they exist) and don’t include warrants, meaning you have a clear line of sight into your cost of capital.
Moreover, a drawback of traditional VC funding is that every firm has a different model for investing. They can base their decisions on what they believe your future will look like and who they think you are.
Revenue-based financing is a bit more straightforward, offering funding based on your proven success without subjective scrutiny or personal risks.
3. Revenue-based financing can cost less in the long run
Many Founders think venture capital is the only way to grow. Taking traditional venture capital requires giving up an equity stake in your company because they are placing a bet on your long-term success.
This means how much it costs the founder is variable based on their success. The more successful you are, the more value you have traded away in your equity round.
Revenue-based financing approaches things differently.
It’s non-dilutive, meaning you’re not giving up equity or board seats. You gain access to additional capital as you grow, which will help you scale faster. The cost of capital is transparent and fixed – making it easy to see a clear return based on what you deploy and when.
Founders will even use a revenue-based financing solution to help bolster a funding round and limit the amount of equity they are giving up.
RBF capital options have a cost, but when you weigh the long-term implications of giving up equity, a growth-oriented Founder who wants to maintain control can significantly benefit from this non-dilutive alternative.
Revenue-Based financing is not anti-VC
You’ll likely face a variable venture capital market when it’s time to raise. If you’re in a place to secure venture funding, you may not be able to wait 3-6 months to hire your next all-star team member.
RBF offers a quick solution to your short and long-term growth challenges. This non-dilutive, low-risk alternative can give you the boost you need to keep growing or extend your runway as you go for an equity round.
There’s not a one-size-fits-all solution when it comes to growing. For many, the traditional funding options of venture capital or bank loans might be a good fit.
But for Founders who need other options, alternative capital like revenue-based financing might be the key to unlocking the next level of growth without trading precious equity or taking on more personal risk.