Guide to equity free capital

Although debt and equity-based financing have historically been the preferred choices for most start-ups, there may be better choices for founders who choose to forgo providing personal guarantees or transferring stock. Because of this, revenue financing has recently gained popularity as one of the available funding solutions.

A portion of a company's potential future revenue is exchanged for money through revenue-based financing. Advances are issued with the presumption that businesses would return a specific percentage of their monthly earnings. For instance, if a business borrows INR 5,00,000, it can agree to repay the loan with 6% of its monthly sales. In contrast to lower-revenue months, higher-revenue months will have a more significant monthly repayment and a shorter overall payback term. Lower-revenue months will have a smaller monthly repayment and a longer overall repayment period.

Lenders who use revenue-based financing will examine your company's financial records to decide how much money they are willing to loan you. Contrary to other sources of startup capital, founders do not need to provide a complex business plan or a pitch deck. In fact, there is sometimes very little documentation required. Instead, lenders use a connection to your back-end systems to decide based on the expected revenue you will generate. Lenders now have days, not months, to offer term sheets for revenue-linked funding. Currently, the market for revenue-based financing is led by players like Klub in India after having funded 300+ D2C brands and digital startups.

The amount of money that lenders of equity free capital are ready to offer you depends on your regular income. Most cap maximum loans at four to seven times monthly recurring sales or up to a third of the company's annual recurring revenue (ARR) (MRR). Depending on whether you intend to use the money for lower-risk, higher-risk, or predictable revenue-generating activities like recruiting or advertising, repayment costs typically range from 6 - 12% of revenue. This keeps happening until the debt has been fully repaid. You won't be battling to pay back a debt your firm can no longer afford if your sales decline for a couple of months. On the other side, if your income increases significantly in one month, you will pay a higher percentage and a greater portion of the loan. Your payback time is drastically shortened as a result. 

Repayments are determined by how well your business performs. You pay more if you succeed. Less money is paid if you do poorly. This implies that e-commerce companies don't have to worry about a post-holiday sales downturn, and service-based companies are better prepared to handle lockdowns and other pandemic-related challenges. ‍