Download MANDII - India’s Leading
MSME Credit App

Cash flow hampering business growth? Get business loan approved in
30 minutes with India’s MSME Atma Nirbhar platform - MANDII

Quick processing time
of 0-30 Mins

Online, hassle-free
digital process

Digital platform that facilitates
quick invoice upload, eSigns, etc

Collateral-free business
loan for MSMEs

Revenue Based Financing:

For any business to achieve sustainable growth and profitability, capital availability and efficient management are crucial. But, while large and medium enterprises can readily access capital through traditional financial channels, small and medium companies often struggle.

Nonetheless, with alternative funding options like revenue-based finance, businesses can now leverage their projected growth and obtain substantial funds in no time. Furthermore, with MANDII, entrepreneurs can simplify the process of looking for reliable sources.

What Is Revenue Based Finance In India?

This funding option is also known as royalty-based financing. It is a viable means of accessing capital with the help of entities invested in the business. Generally, financiers offer a percentage of the enterprise’s projected revenue (based on past sales) to investors. This funding arrangement shares features of debt and equity-based financing. 

In revenue-based financing in India, investors or financiers receive periodic payments until the agreed-upon sum is disbursed in total. Often this amount tends to be a multiple of their sum they had invested in a business. It ranges anywhere between 3X to 5X of the invested amount. 

Unlike equity-based financing, entrepreneurs do not necessarily give away a percentage of their ownership. This works in favour of start-ups and helps entrepreneurs access funds without losing control of their venture in any way. 

How Does Revenue-Based Financing Work?

In a nutshell, revenue-based finance is a process wherein enterprises approach financial institutions to access capital in exchange for a portion of projected monthly or annual revenue. 

Take a look at this example below to gain a detailed insight into the steps involved in this financing arrangement. Suppose Akash, a new MSME owner, approaches a financial institution for revenue-based financing. Such financier follows a series of steps discussed in these pointers below - 

  • It factors in the enterprise’s recurring expenses and past revenue record for predicting future earnings.
  • Based on the evaluation, the financier sanctions Akash an amount equivalent to a specific percentage of the estimated earnings.
  • He uses the sum availed to meet his business-related requirements.
  • At the end of the agreement period, Akash pays a fixed percentage of its revenue to clear the debt. 

Since the repayment rate is linked directly with revenue, a decline will lead to a drop in that rate. If returns are marginal during a low business cycle, entrepreneurs may take longer to pay off the borrowed sum. 

Benefits Of Revenue-Based Financing: 

Typically, businesses apply for revenue-based financing to resolve growth capital-related crises. They can reach out to a trusted financial institution via the MANDII app by simply on the platform and uploading a few essential documents.

On that note, let’s glance through the most important benefits of availing revenue-based financing solutions –

  • Low-Risk Factor: The fact that small and medium businesses do not have to provide any high-end asset as collateral makes this funding option less risky. The lack of collateral also allows small businesses without any substantial asset to seek a loan readily.
  • Immediate Assistance: Leading fintech companies disburse sanctioned amounts typically within 3 business days. This helps entrepreneurs to account for their immediate cash requirements without much delay.
  • Repayment Tenure: Most financial institutions allow businesses to borrow funds for the long-term and set simple repayment terms. This helps them to repay the availed sum at a relaxed pace without straining available funds.
  • Flexibility In Payouts: Businesses enjoy flexibility in terms of payment as the same is variable. In other words, the repayment amount gets adjusted as per the quantum of revenue. For instance, when incomes are high, the repayment amount is high and vice versa.

While the pros of this funding option are many, individuals should make it a point to find out about associated charges and terms of repayment in advance to simplify the process further.

Also, businesses must factor in these two attributes before opting for revenue-based finance

  1. Both the sanctioned loan amount and flow of repayment will depend on their past and projected revenue. Thus, enterprises can only obtain a sizable sum if their past and projected revenues are such. 
  2. The enterprises should have a substantial profit margin to ensure smooth repayment of the borrowed sum. With a thin margin, companies may delay repayments or might need to funnel funds for daily operations towards dues.

Based on these, they may proceed to apply for revenue-based finance. However, one must note that businesses have to meet several qualifying criteria and compare terms of multiple financing institutions before availing funds from a financier.

The series of steps involved in applying and qualifying for funds is quite tedious, especially during emergencies. However, small and medium enterprise owners can simplify their borrowing experience by a great deal by registering on MANDII. What works best for this set-up is that all formalities concerning the borrowing process are carried out through the app with the financier’s limited involvement.

Difference Between Revenue-based Financing And Debt-Based Financing:

Though both debt financing and revenue-based finance in India require borrowers to repay the borrowed sum regularly, these funding options are quite different from one another.

Take a look at this table to gain a clear idea –

Parameter

Revenue-based finance

Debt Financing 

Interest Payment

It does not involve any interest payout.

Borrowers pay interest on the owed sum.

Collateral 

There is no such need for providing collateral.

Borrowers may be required to provide collateral.

As an entrepreneur, one may want to keep these fundamentals in mind when they apply for revenue-based finance solutions via MANDII. Also, one should go through the terms of repayment and other vital details before selecting a particular financier. The financing app will help match with the leading financial institutions whose requirements match with that of borrowers.

Download the MANDII app now and browse for the best financing options in a few clicks!

FAQs on Revenue Based Financing:

A. The answer depends entirely on the business’s situation, capital requirement, repayment capability, and willingness to retain control over the company. Revenue-based financing is suitable for those who wish to maintain control over the firm. In contrast, equity financing is best for those who do not want to incur a monthly repayment burden.