How Revenue-Based Finance Works and Who It’s For

With the proliferation of data across all industries, it was only a matter of time before financial institutions began to harness the potential of transacting digitally. Software-as-a-Service (SaaS) companies are now creating predictable recurring revenues, making it easier for third-parties to measure them, and revenue-based funding (RBF) has been able to leverage the recent availability of this digital financial data to drive both lending decisions and repayments, creating a new class of product.

An increase in e-commerce has allowed a new wave of businesses to access capital previously unavailable to them, by using the established merchant cash advance business model. RBF takes this model and utilises payment processors, open banking and modern APIs, to pull data and get information about that business to make a lending decision; forecasting potential growth if a business is able to effectively market its own inventory.

How Did the Industry Evolve & Where Did Demand Come From?

The industry began by building processes to garner insights with access to rudimentary data sources from payment processing giants such as Stripe. The range of data has grown exponentially to include emerging open banking technologies, integrations with accounting platforms such as Xero, and credit reporting providers. With access to data sources that were novel to underwriting, demand initially came from businesses that traditional banks were not equipped to underwrite.

At Outfund for example, the company is able to leverage Leverage In financial trading, leverage is a loan supplied by a broker, which facilitates a trader in being able to control a relatively large amount of money with a significantly lesser initial investment. Leverage therefore allows traders to make a much greater return on investment compared to trading without any leverage. Traders seek to make a profit from movements in financial markets, such as stocks and currencies.Trading without any leverage would greatly diminish the potential rewards, so traders In financial trading, leverage is a loan supplied by a broker, which facilitates a trader in being able to control a relatively large amount of money with a significantly lesser initial investment. Leverage therefore allows traders to make a much greater return on investment compared to trading without any leverage. Traders seek to make a profit from movements in financial markets, such as stocks and currencies.Trading without any leverage would greatly diminish the potential rewards, so traders Read this Term access to a large number of data points including revenue generation and growth, cash position, contribution margin and creditor/debtor balances, and using data science models in order to make lending decisions.

Who Is It For?

The scope for RBF is expanding. Initially, only businesses transacting on supported platforms were able to take advantage of this source of capital, however, more recently, with the expansion of data sourced from open banking, the reach and relevance of RBF is expanding. Whereas it had previously been limited to e-commerce, it is now available to SaaS, as well as effectively anyone with an online business model.

Who Isn’t It For?

For traditional businesses with a long history of performance, there are alternatives. Companies with slower growth but consistent revenue typically have access to cheap debt from banks and financial institutions, and these rates are usually cheaper than the ones offered by an RBF provider.

RBF providers are currently only funding for growth. Businesses with requirements for working capital, for example, will need to seek out alternative sources of funding.

The Advantages of RBF Compared with Other Forms of Funding

Credit and trading history are primary indicators for banks and traditional financial institutions when they consider which companies to provide loans to. For most startups, while they may have consistent revenues, historical data and long-term credit reporting can be difficult to provide.

For companies that wish to avoid unnecessarily giving up equity for venture capital, RBF has the potential to allow revenue generating companies to bridge Bridge The bridge or liquidity bridge is an essential component for brokers that are enabling their clients to trade at interbank rates directly via a Prime Broker or a Prime-of-Prime (PoP). While market makers do not require a bridge in order to service their clients, brokers which are sending through orders to a liquidity provider or an electronic execution venue need a bridge to connect their trading platform to the interbank market.Bridges are used extensively in forex trading, specifically for Met The bridge or liquidity bridge is an essential component for brokers that are enabling their clients to trade at interbank rates directly via a Prime Broker or a Prime-of-Prime (PoP). While market makers do not require a bridge in order to service their clients, brokers which are sending through orders to a liquidity provider or an electronic execution venue need a bridge to connect their trading platform to the interbank market.Bridges are used extensively in forex trading, specifically for Met Read this Term into a longer-term increased valuation, by taking loans against future revenues and using this to fund growth in the near-term. Additionally, RBF allows companies that have capital committed to replace some of that equity sale with debt, therefore reducing dilution.

Daniel Lipinski is the CEO at Outfund.