As traditional funding methods see headwinds during global macroeconomic challenges, revenue-based financing (RBF) is emerging as a convenient, viable option to bridge working capital gaps and boost business growth.
This is primarily because venture capitalists (VCs) are taking an increasingly cautious approach to investing due to the current market uncertainty and fears of a looming years-long recession.
And for founders who manage to secure VC funding, unavoidable dilution — the process of gradually giving up ownership of your company in exchange for funding — can leave them with as little as 10% to 30% of their company after a fundraising round, Julien Zerbib, CEO of French FinTech firm Unlimitd, told PYMNTS in an interview.
The other option is to seek a bank loan, a process which has become increasingly challenging due to high interest rates, banks’ reluctance to lend to certain businesses and the long delays — often several months — to get the funds.
Against that backdrop, it’s no surprise that the RBF model is starting to gain traction.
“The idea is to create a third option to banks and classic fundraising in equity because these two existing ways of financing are harder to access today,” Zerbib explained.
Read more: Revenue-Based Financing Challenges The Bank Loan Status Quo
Through the RBF option Unlimitd provides, startups can secure financing in less than 48 hours, as the firm leverages live data insights and analytics, a strong scoring system and connection to company bank accounts to quickly analyze and make rapid lending decisions.
To protect against risks, loans — ranging from $10,000 to $250,000 — are offered with short-term maturity of four to 12 months, with the possibility to refinance rapidly depending on the customer’s growth results.
“We’re changing the game,” Zerbib added. “We don’t ask founders for any personal guarantees or any dilution on their equity and we work on a flat fee, which depends on the type of business involved and on the risk we are taking on the company.”
eCommerce, Subscription-Based Models
Among the models that hold huge potential, Zerbib highlighted subscription-based businesses because of their lower risk and how their recurring revenues make it easier to project growth.
For eCommerce businesses looking to finance their inventory, they have the option to connect their bank accounts to the platform, sending their supplier invoices to Unlimitd, which pays them on their behalf. Retailers can also get funding for their advertising and marketing expenses by using the Unlimitd virtual credit card, developed in partnership with Stripe, to purchase ads.
In both cases, they can pay back the funds in installments based on their future revenue.
See also: Revenue-Based Financing Drives eCommerce, SaaS Growth Across MENA
Overall, about 75% of the FinTech firm’s clients are subscription-based businesses, compared to 25% for eCommerce businesses — an indication that the RBF model could drive significant growth for the recurring revenue model moving forward.
When it comes to competition, Zerbib said Unlimitd’s value proposition, compared to a local industry player like Silvr, is that it is flexible and focused on creating tailor-made financial solutions for its customers.
“We have observed that Silvr is thinking [and investing] like a VC. They are [more focused on] the growth potential of a company, the market size, the team,” he added, noting that on the Unlimitd side they have adopted an entirely different approach based on cash flows.
Another factor that sets the company’s non-dilutive financing solution apart from other players is the emphasis it places on environmental, social and corporate governance (ESG), he noted, offering customers the possibility to get cheaper financing if they have good ESG ratings.
VCs Now Care About Profitability
Due to the current macroeconomic turmoil, VCs’ approach to investing has taken a dramatic turn to what it was a few months ago, Zerbib said.
“Six months ago, they were only interested in growth and firm valuations, even if companies were losing money,” he continued. “They didn’t care about the profitability of the company [they were investing in], they were just interested in market share volume.”
Today, with rising inflation and the ongoing crisis in Ukraine, interest rates have spiked and investors cautiously waiting to see how events unfold are now placing a stronger emphasis on the business profitability.
It’s the reason why Zerbib said although the FinTech wants to make funds available to the market, it has to be extremely cautious about the level of risk it can take on in these uncertain times, as it looks to build a profitable company with the lowest default rate possible.
“The idea is to find a good balance between the level of risk you take, the interest rate you are paying on your debt and how you lend money to the market,” he said. “If you’re able to minimize your level of risk you can make your revenue-based financing company profitable [in the long run].”
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