Is RBF an alternative to traditional loans and venture capital?

The era of “move fast and break things” looks to be over. Once conducive to unicorns and venture capitalists with a kingmaker bent, this high-growth and high-risk mentality is losing appeal among business owners amid decreasing stock prices and the economic fallout from the Covid-19 pandemic.

Some entrepreneurs like Treman Singh Ahluwalia prefer to take a slower but steadier path to growth. He owns Sugar Watchers, an Indian company that produces low-GI (glycemic index) variations of food staples such as rice and sells them online.

Ahluwalia is aiming to raise money from investors once his company reaches the right valuation. Until then, he’s relying on revenue-based financing (RBF), an alternative type of loan that’s paid back with a percentage of the borrower’s gross revenue, to help the business grow.

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The RBF provider may require borrowers to pay a flat fee, which is equivalent to a percentage of the loan amount. For example, a business might take a US$10,000 advance that incurs a flat fee of 10%. It will have to pay back a total of US$11,000.

If the startup achieves a revenue of US$20,000 in the first month, it pays US$2,000, leaving a balance of US$9,000. The company will continue to pay out a percentage of its revenue until the loan is fully paid.

Businesses end up repaying less during challenging situations.

Unlike in the West, RBF isn’t a popular method of raising capital in Asia, according to Jeffrey Liu, co-founder and CEO of Jenfi, a Singapore-based provider of such financing. But He believes that might change in the aftermath of Covid-19.

“RBF ties repayment to a share of revenue, which means businesses end up repaying less during challenging situations, such as the current Covid-19 pandemic,” he explains. “We are seeing increased demand for our product given the pullback from traditional lenders and the pent-up demand for SMEs.”

Jenfi offers a debit card to its clients that can be used for expenses paid with the loan / Photo credit: Jenfi

India-based fintech firm GetVantage is also seeing soaring demand for such financing, company founder and CEO Bhavik Vasa says. In the past two months, as Covid-19 pushed businesses to boost their digital presence, the firm, which provides RBF loans for startups spending on digital marketing, cloud hosting, and digital infrastructure, has seen a 70% uptick in applications.

Ahluwalia also believes RBF will soon gain traction as it’s attractive to business owners who seek cash without getting equity investors involved. Sugar Watchers currently obtains funds through GetVantage, which claims to be the first in India to offer this form of lending.

How RBF works

To apply for RBF, businesses need to show positive operating margins, enabling loan providers to evaluate borrowers based on future potential earnings rather than operating history. Companies don’t need to provide collateral or sit through months of investor due diligence.

Tracking how the loan is spent

A new asset class

Not for everyone