What is Revenue-Based Finance and How Does It Help Sellers Grow?
Revenue-Based Finance is an alternative financing model for digital businesses to raise capital based on future revenues of the company. RBF provides companies with quick access to non-dilutive capital and helps them grow their business faster. In this article, you will find out how RBF can help boost your sales on Amazon.
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What is Revenue-Based Finance?
Revenue-Based Finance (RBF) is an investment tool that provides you with capital without having to give equity in your company or putting up collateral to secure a loan. This type of financing provides digital businesses with liquidity to invest in online marketing campaigns and inventory sourcing. Repayment is made by a small fixed percentage of sales, so the pace of the refund is determined by your revenue. So, when you have a good month you can pay a higher proportion of the loan. By contrast, if your sales decrease, the repayments will also decrease while the total loan amount remains the same over time.
This type of financing has been designed to fund digital businesses that have recurring revenues, such as Amazon sellers.
RBF arises from the need to obtain a cash flow to prepay costs that are closely related to sales, such as digital marketing campaigns or inventory supply. Revenue-based financing improves operations by improving the inventory cycle, the sales cycle, and, most importantly, the cash cycle.
How does RBF work?
Businesses in need of funding will connect their digital marketing and payment accounts to the capital provider’s platform. Companies like RITMO will analyze this data in less than 24 hours and will be able to make you an offer with the money they can provide. Once the deal is signed you will have the funds in your wallet instantly. In the exchange, the customer will share a fixed percentage of future sales with the capital provider until the full advanced amount plus a commission is repaid. Repayments are usually made daily, weekly, or monthly through a direct debit agreement, which allows the capital provider to charge the customer an agreed percentage of observed sales within each specific time period.
Therefore, as we said before, there is no specific repayment period, but an estimated repayment one. The final repayment schedule will depend on the performance of the business: the higher the sales growth, the shorter the repayment period.
Why has RBF become so powerful in recent years?
There are several reasons that may explain the rise of Revenue-Based Finance. The main ones are:
- This is a very fast type of funding, in less than 24 hours after connecting the marketing and sales accounts you will receive an offer.
- No personal guarantees or collateral are required.
- Business owners accessing this type of financing do not have to dilute their stake in the company to obtain the funds. It is non-dilutive financing.
- Retailers do not have to pay large amounts of money upfront to their suppliers to obtain inventory. RBF will take charge of paying these invoices and sellers will only have to pay them back as they receive the goods and sell them.
- Nor do they have to make an unaffordable digital marketing investment out of their own funds. RBF is also responsible for financing these campaigns and sellers will pay back the investment as the ads translate into sales.
- It adapts to business seasonality. Sellers and e-commerce companies usually have more funds after their seasonal peak, such as after the Holiday Season, Black Friday, PrimeDay, etc. However, they need to have more liquidity before these dates arrive and sales start to pick up (and not after), in order to be able to stock more and make greater investments in marketing campaigns.
RBF offers financing in a strategic way so that retailers can have the funds they need to prepare for the peak season, and use strong sales in those months to pay back the investment gradually.
How can Revenue-Based Finance help Amazon Sellers Grow Faster?
In addition to the benefits discussed above, RBF is a special attractive option for Amazon Sellers because of the flexibility it gives them within their inventory and sales cycle.
Having the funds available in advance and paying it back when sales are made gives sellers extra security when it comes to, for example, more aggressive marketing strategies. Betting on this type of strategy and having enough funds to bid for the positioning of your products on dates as important as Prime Day or Black Friday will be key to maintaining a winning position in the market.
On the other hand, RBF also offers the possibility of having a larger inventory, something that Amazon always rewards, without putting your company’s cash flow at risk. A strategy of greater stocking of inventory can also offer you a number of other benefits at the time of purchase:
- Negotiating a better price per unit with suppliers. The higher the volume of purchase, the cheaper the price per product.
- Minimise the impact of possible price increases.
- Avoid seasonal shortages of products.
How RBF can help sellers survive the current logistics crisis
Online sales increased by more than 200% during the pandemic compared to previous years and this trend has continued over time.
This increase in online sales coupled with the slowdown in freight transport caused by the Covid protocols, port closures, shortage of raw materials… has led to a logistical crisis situation. The price of sea containers has increased fivefold and is now at an all-time high. Delays in shipping freight, rising transport costs, and a lack of raw materials have meant that sellers are experiencing serious problems in stocking up their inventories and selling their products.
In the last quarter of the year, which includes important dates such as Black Friday or the Holiday Season, sellers can expect to make up to 60% of their profits during these months. Avoiding stock-outs during these last months is key not only for the monetary losses but also to maintain their position in the market.
One option to avoid situations like this is to increase inventory cycles, by stocking more inventory in order to be sufficiently supplied even if delivery times are extended.
Having a surplus inventory strategy has many advantages but it also has a major disadvantage: lack of liquidity. For many businesses, the upfront cost of stocking up with surplus inventory is not affordable. In this type of situation, relying on RBF will allow you to have the necessary liquidity to carry out this type of strategy.
It should not be forgotten that in situations of crisis and uncertainty such as the one we are currently experiencing, relying on a company’s historical data will be key when planning strategies.
Finally, we would like to encourage all sellers and eCommerce businesses, if they can afford to take a little risk in these situations, then they should do so. In the same way that the crisis is driving many businesses into the ground, if yours is well managed and well-financed, there is a greater opportunity than ever to grow and take the market share of those businesses that have had to disappear.
RITMO provides fast access to non-dilutive capital to help Amazon Sellers and e-commerce businesses grow fast. Through an innovative technology platform, RITMO can provide up to EUR 3M to fund your inventory or marketing campaigns in just 24 hours by simply connecting to your main Shopping/Sales platforms (including Amazon Seller Central, Prestashop, WooCommerce, Shopify, Stripe etc.).