December 16, 2021
How does Pipe compare to revenue-based financing?
When you’re ready to scale your company, a lack of liquidity is one of the most common roadblocks founders face. You might know the cash is coming—but you need it in hand if you want to make those key hires, upgrade your tech, build your inventory, or ramp up your marketing campaigns.
Some founders will turn to equity financing, loans, or venture debt to access the needed capital. But taking on restrictive debt or dilution isn’t always the best way to go—founders might need or prefer financing that provides more flexibility and freedom. When that’s the case, many founders with scaling businesses find themselves turning to alternative financing solutions.
Consider this: in today’s economy, more things than ever are, or will soon become, a source of recurring revenue. And companies with predictable recurring revenue may not need to rely on traditional debt or equity financing at all. Instead (or in addition!) they can harness their recurring revenue as an asset to get access to capital quickly.
This can take a couple shapes:
trading your recurring revenue on Pipe
or using traditional revenue-based financing—what some may call a merchant cash advance.
These may sound similar, but they’re not. The distinction between trading your recurring revenues (a.k.a. what Pipe offers) and revenue-based financing can have significantly different impacts on your business. While both allow you to leverage elements of your recurring revenue for capital, they vary greatly in risk, cost, and scalability.
What’s revenue-based financing, anyway?
Revenue-based financing (we’ll call it RBF, for short) is a form of business financing that provides you with capital in exchange for a fixed percentage of your revenue over time. Effectively, it’s a repackaged loan. (For context, Pipe isn’t a loan at all. It allows you to trade a portion of your recurring revenue for up-front capital, by connecting you directly to the capital markets—but we’ll get back to that in a minute.)
With RBF, your future revenue becomes collateral for the loan. Repayment is typically based on a percentage of revenue each month until a predetermined multiple is repaid. For example, you might repay 5 percent of your revenue each month until you’ve paid twice the amount borrowed.
Advantages of revenue-based financing
RBF’s biggest draw tends to be that companies with predictable revenue can access it even if they don’t have the assets to get a more traditional loan. It’s a non-dilutive way to get cash relatively quickly, often with fairly uncomplicated qualification requirements compared to traditional loans. In fact, RBF providers often promote the fact that they’ll approve you for financing when others won’t.
Disadvantages of revenue-based financing
RBF may initially be convenient, but—like payday loans for personal funds—there are some serious strings attached. You can get quick access to cash on the front end, but it can cost you a mountain in the long run when you consider the total amount you repay (also called the repayment cap). This can turn a short-term play into long-term repercussions.
Unlike traditional loans, revenue-based financing doesn’t have an interest rate. Instead, as mentioned earlier, you pay back a predetermined multiple of the amount you borrowed. Multiples of up to 3x the amount financed aren’t uncommon—which means borrowing $100K today could cost you $150–300K to repay. (If that were an interest rate, it would be as high as 50–200 percent!) While a variable repayment model can be an advantage over traditional loans if your revenue dips, most lenders are expecting you to grow moving forward. That means your payments grow as your business grows… Which can make it harder to plan ahead, increases your cost of capital, and can pull down your cash flow.
Another limitation of revenue-based financing is which businesses and industries it can serve. Depending on the lender or the bank providing the funds, many revenue-based finance companies will only work with certain high-growth industries, like tech. If your business doesn’t fit the mold, you could be disqualified right out of the gate.
Revenue-based financing can be helpful for just the right company under just the right circumstances, but it’s critical to be aware of the risks and just how much you’re really paying for that cash. Without careful planning, expensive forms of financing like RBF can do your business more harm than good.
How Pipe compares
Flexible financing that fits your business
Because RBF providers are dependent on the underlying loan (often provided by a bank) they can be limited in scope as well as in the industries they can serve. The lender dictates who can be funded and how much funding they can access. Many RBF lenders are capped at a few million dollars in funding and may only serve high-growth tech companies, SaaS, or eCommerce businesses.
As a trading platform, Pipe doesn’t try to fit your business in a box. Instead, we make your revenue streams available to institutional investors looking for a diverse mix of revenue streams. That means Pipe can be a great fit for many businesses with recurring revenue, whether they’re SaaS, D2C, service businesses, or something else entirely. With Pipe, your access to growth capital is limited only by your recurring revenue and the health of your business.
→ The takeaway? Pipe’s trading platform connects diverse recurring revenue businesses directly with growth capital. You don’t have to be a white-hot tech startup to get the funds you need to grow, when you need them.
Cost of capital
Pipe and revenue-based financing treat your recurring revenue quite differently. RBF uses your revenue as collateral for a loan, while Pipe treats it as a tradable asset. Does it really make a difference which you use if it gets you access to the capital you need? The short answer is yes!
Most revenue-based financing companies are either backed by a bank or raise their own debt facility to provide loans to businesses. They essentially repackage debt and sell it to business owners like you. By lending money off their own balance sheet, they’ve already incurred a cost of capital and need to mark that cost up to create a profit margin for themselves. For you as a business owner, that’s a lot of extra mouths to feed.
Pipe isn’t a lender. The capital you need comes directly from institutional investors, cutting out an unnecessary layer of costs you’d otherwise have to carry. Pipe charges a small flat fee on trades on both sides instead, so it’s steady for all parties involved.
→ The takeaway? Pipe is a trading platform, not a lender, which keeps your cost of capital down. RBF lenders stack profit margins on top of their own costs, often leaving you with a much higher cost of capital.
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Disclaimer: Pipe and its affiliates don't provide financial, tax, legal, or accounting advice. What you're reading has been prepared for knowledge-sharing and informational purposes only. Please consult your financial and legal advisors to determine what transactions and decisions are right for you and your business.
