Start-ups: out with bank loans, in with RBF!

Start-ups, especially in the seed and development phase, face a major problem: access to finance. While bank loans are not to be avoided, their complexity and rigidity makes entrepreneurs turn to alternative solutions, starting with Revenue-Based Financing (RBF).

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The study conducted by the consulting firm PwC in 2019, "European Start-up Survey" leaves no room for doubt: 1 in 3 start-ups in Europe believes that access to funding is complicated for them. In detail, the bank loan represents only a tiny part of their budget sources (3.2%). It is self-financing that stands out (66.5%), far ahead of solutions such as venture capital (13.4%) and business angels (8.7%). So where have the banks gone?

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The bank loan, an unsuitable resource

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It will come as no surprise that banks are reluctant to lend money to profiles with a high risk of default. And start-ups fall squarely into this category! The stats don’t lie: in France, one in two start-ups goes bankrupt, and only 30% of them reach the point of profitability(KPMG Pulse).

For a credit institution, financing start-ups remains a counter-intuitive activity. Its business is risk management. The banker must ensure, with financial data, that the company will be able to repay the loan instalments. This approach is not suitable for a company that is growing rapidly – and therefore in urgent need of cash. Not only does it lack a solid accounting and financial history, but it also has to deal with variable and hypothetical revenue projections.

Finally, start-ups, particularly in the digital sector (Ecommerce, SaaS, etc.), have few or no tangible assets (industrial equipment, patents, real estate, etc.) to provide as collateral to banks. This applies to the founders themselves, who are often young graduates already heavily involved in the initial development of the company.

Let's be pragmatic: the bank loan is only a marginal financing solution for start-ups. But fortunately for them, other solutions exist.

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RBF: fast, non-dilutive and flexible

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No, it is not only banks that lend money. No, a start-up does not have to go through the “equity raising” process to meet its financing needs. And yes, among the range of alternatives available, Revenue-Based Financing (RBF) is very popular with entrepreneurs.

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Launched in 2015 in the heart of Silicon Valley, and very quickly adopted by the North American “Tech” scene, RBF is now accessible to European start-ups. Silvr, a pioneer of RBF in France, has already supported around 100 young companies, with amounts ranging from €10,000 to €10 million euros.

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But what is it in practice and who is it for?

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Revenue-Based Financing has three advantages: speed (funds are released within 24-48 hours), non-dilutive nature (capital neutrality), and flexibility (repayments are based on revenue).

This immediate advance on future sales is particularly suitable for start-ups with predictive revenues, whether they are SaaS companies, marketplaces or e-retailers. And for the latter, there is no need to present a business plan or a capitalization table to obtain financing: a simple analysis of sales performance via the Ecommerce stack (Shopify, Google Analytics) or SaaS stack (ChargeBee, Stripe) is enough.

In fast-growing markets where first-time entrants have a clear advantage, these start-ups need to accelerate their customer acquisition campaigns – and cannot afford to wait for future cash flow. And that's exactly what RBF allows them to do, by optimizing their cash flow for a commission of 6-10% on the amounts distributed.

Other financing solutions exist for our entrepreneurs (micro-credit, MCA, asset-based lending, factoring, etc.), but as Sifted aptly states in an article on Tech trends in 2022, RBF seems to be emerging as one of the must-haves in alternative financing.

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