Revenue based lenders (RBLs) are the next new thing in Europe, with many new funds dedicated to this new way of non-dilutive finance.
It is a simple product, meant to help founders with working capital. Cash is advanced to founders, at a rate of 1x to 1.5x their revenues. The repayment happens at a fixed percentage of their revenues, between 10% to 25% which is dependant on the risk rating.
Unfortunately, with RBL’s there are cases when pricing is not necessarily clear to the founder, especially if you consider multiple loans throughout the year or are gradually increasing your debt exposure.
Often, it is presented as a friendly solution, and it can be for founders with a slightly elongated sale cycle where they have the ability to manage cash-outflows from equity or reserves.
With RBLs, the payments are not fixed, and vary from month to month until the balance is repaid. The lender gets the regular amount of income dependant upon the percentage of revenue.
Many founders are starting to realise that there is more to the story than a what RBLs advertise (‘simple fixed fee’). In some cases, they end up being higher than what was originally presented to the founder.
One thing is clear the fixed fee is not an annualised interest rate. The reality is that if you took the facility again, another fixed fee would apply to the new loan. If your company is growing quickly then you could end up recycling the cash and taking 3 or 4 RBL facilities per year. It means that a great company end up paying somewhere 18%-36% on an annualised basis depending on their credit rating. If we add to this the fact that many of these companies will be increasing the loans to cater for a growing business activity, it is easy to see how lucrative the model is.
At Juice, we are fundamentally entrepreneurs, building businesses similar to those of our clients. We think that both our message and the way our products operate needs to align.
We have created products where founders can access a revolving credit facility without having to apply for multiple credit applications. In some cases, we need to scale our facility sizes over time, to allow them to grow and build resources for their ad campaigns, or inventory. In other cases, we would not want our companies to be over-exposed, especially if they are dealing with cyclical or seasonal businesses. Juice has been created for companies that are on a mission to bring unique products to their consumers.
What to keep in mind before going for RBL?
Although revenue-based financing has many benefits and appears as a simple product, there are elements founders should pay attention to before opting for this source of funding:
Not for new businesses
Lenders always check the revenue graph of a company before investing money in its business. They have certain rules and eligibility criteria. And if any business does not fulfill the criteria the lenders do not invest their money. So, the revenue-based financing is not for the newly established businesses.
In Revenue-based financing cost of capital is very high. Because you have to invest much more interest rather than the real investment. However, the monthly payment process makes the high-interest rate accommodatable.
A revenue-based lender does provide you prepayment incentives. Prepayment incentives are the discounts or pre avoided interest that lenders offer to the borrowers to encourage. But the revenue-based lenders do not provide such kinds of incentives So, that’s the reason revenue-based financing is not preferred.
Revenue-based lenders require monthly payments.In starting a business may face some financial issues and maybe they are not able to pay monthly payments. So, revenue-based financing is not suitable if you have not started selling your products or the profit graph of your business is not high.
In revenue-based financing, a borrower has to pay interest for the long term because of the high amount of loan. So, it becomes a very long-term process to pay all predetermined amounts to a lender.
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