TL;DR - Definition and explanation of revenue-based financing
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Tags - revenue-based financing, royalty-based financing, financing, startups
- What is revenue-based financing?
- How does revenue-based financing work?
- How is revenue-based financing different from debt financing and equity financing?
- What types of companies use revenue-based financing?
- Revenue-based financing (also known as royalty-based financing) is a method of raising capital for a business from investors who receive a percentage of the business’s future ongoing gross revenues until a predetermined amount (typically a multiple of the principal investment - usually between 3 to 5 times) has been paid.
- Revenue-based financing is often considered as a hybrid between debt financing and equity financing.
- Unlike debt financing, interest is not paid on an outstanding balance and there are no fixed payments.
- Payments to investors vary based on the level of the business’s income.
- Unlike equity financing, investors do not have direct ownership in the business.
- Revenue-based financing is most often used by small to mid-sized companies who otherwise cannot obtain more traditional forms of capital.
- The transaction costs for revenue-based financing can be considerably more than those for a conventional loan since investors become something of a business partner.
- Many VCs are getting more creative with revenue-based financing methods for businesses in the Software-as-a-Service (SaaS) industry.
Follow up links:
- Debt financing, https://www.investopedia.com/terms/d/debtfinancing.asp
- Equity financing, https://www.investopedia.com/terms/e/equityfinancing.asp