Invoice vs. Revenue-Based Financing: Choosing the Right Financing Strategy for Your Business
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As the economy struggles to regain momentum, many companies seek flexible business financing solutions to access capital without the constraints of rigid repayment terms. Using revenue to secure financing enables businesses to access capital without the burdens of equity dilution or rigid repayment terms.
Invoice financing and revenue-based financing are two examples of funding solutions used to leverage income. Although they both provide access to cash based on income, they are not the same. Invoice financing is more transactional, focused on current and outstanding invoices, while revenue-based financing is based on future revenue and involves a longer-term repayment structure. Understanding the differences will better position your company to choose the best of these financing strategies to support sustainability and growth.
Why leverage revenue to secure financing
Leveraging revenue to raise capital offers businesses non-dilutive, flexible, and fast funding to support growth while maintaining ownership. Invoice financing allows businesses to borrow against outstanding invoices, improving cash flow by accessing funds before payment. Revenue-based financing provides capital based on future revenue, with repayments tied to monthly earnings, offering flexibility without needing specific assets. Both options offer quick access to capital and scalability but differ in how they are structured and repaid.
Here’s a summary of the key differences:
Invoice financing
This flexible financing option empowers companies to leverage the combined value of its outstanding accounts receivable invoices to build a revolving line of credit.
How it works: An initial credit line is set up with immediate funds available, replenishing as invoices are paid, allowing businesses to continuously access capital for operations, inventory, or working capital.
Benefits: Businesses are given immediate access to cash, allowing them to bridge gaps in cash flow while waiting for customers to pay their invoices.
Cost: Financing rates are based on a percentage of invoice values, typically ranging from 2% to 5% depending on the lender, the amount of financing, the creditworthiness of your business and customers.
Users: This flexible financing option is particularly beneficial for B2B businesses that issue invoices with long payment terms or experience seasonal fluctuations in revenue. It is best used to stabilize financial structures by regulating cash flow.
Revenue-based financing
Revenue-based financing allows businesses to access a significant upfront injection of capital based on their future revenue streams.
How it works: Businesses receive capital with no fixed payments, repaying through a percentage of weekly, monthly, or quarterly revenue until a predetermined total is reached. Repayments fluctuate with sales, increasing during higher revenue and decreasing when revenue is lower.
Cost: A factor rate or a multiple of the original funding amount is applied to determine cost of revenue-based financing. This means businesses repay the principal plus a percentage-based fee. The total repayment amount can range from 1.1 to 1.5 times the original loan amount, depending on factors like the business’s risk profile, revenue stability, and repayment term.
Users: Revenue-based financing is ideal for businesses with recurring or predictable revenue streams, such as SaaS companies, e-commerce businesses, or subscription-based models. These businesses should have consistent sales and growth potential but may not have sufficient collateral.
Case examples
To better illustrate the differences between these financing options, consider the following two case examples.
Example: A Manufacturing Company Using Invoice Financing
Business Overview:
Precision Manufacturing is a company that specializes in producing custom industrial parts for large businesses in the automotive and aerospace sectors. The company has a strong customer base and receives large, recurring orders from major clients. However, due to the long production cycles and delayed payments from customers, Precision Manufacturing often faces cash flow challenges. To manage these gaps and maintain smooth operations, the company decides to use invoice financing.
How Invoice Financing Helps:
- Capital Injection:
- Precision Manufacturing partners with an independent funder specializing in invoice financing and decides to finance £500,000 worth of outstanding invoices. These invoices are due within 30 to 60 days from its clients.
- The lender advances 90% of the combined invoice value to create a £450,000 line of credit. The remaining 10%, or £5,000, will be paid once clients settle their invoices, minus any applicable fees.
- Flexible Repayments Tied to Invoice Payments:
- Repayments to the lender are tied directly to the payment of the invoices allowing Precision Manufacturing to align its payments based on actual cash inflow.
- Fee Structure:
- The lender charges a factoring fee of 2.5% of the invoice value, which is deducted as part of each repayment. For example, on a £100,000 invoice, the fee would be £2,500 plus any associated fees.
- No Long-Term Debt Commitments:
- There is no fixed term for repayment. Instead, the company repays the financing based on customer payments.
- As each invoice payment is received and pays down the loan, the revolving line of credit is replenished, freeing up available credit to be borrowed again, providing ongoing access to funds.
By using invoice financing, Precision Manufacturing is able to bridge the gap between invoicing and payment, ensuring continuous production and smooth operations even during periods of delayed customer payments. The flexibility of the repayment structure—tied to actual revenue—helps the company maintain financial stability while focusing on growth and meeting customer demands without taking on long-term debt obligations.
Example: A SaaS Company Using Revenue-Based Financing
Business Overview:
SmartSuite is a SaaS company providing subscription-based software to small businesses, with steady revenue but seasonal cash flow fluctuations. The company seeks capital to expand its product offerings, invest in marketing, and improve its platform.
How Revenue-Based Financing Helps:
- Capital Injection:
- The company partners with a lender that specializes in revenue-based financing and receives £500,000 to help with its expansion plans (such as marketing campaigns, hiring new employees, and enhancing the product).
- Flexible Repayments Tied to Revenue:
- The company pays 5% of its monthly revenue towards the loan.
- Repayment Example:
- In a strong month where the company earns £100,000 in revenue, it would pay £5,000 (5% of revenue) towards the loan.
- In a slower month, when revenue drops to £60,000, the repayment amount would drop to £3,000 (5% of revenue).
- The amount of each payment contributes to the duration of the loan. Larger monthly payments shorten the period, while smaller payments extend it.
- No Fixed Term:
- The total repayment amount is a simple calculation using a multiple of 1.5% applied to the capital raised. This means the company will repay £750,000 over time.
By using revenue-based financing, the SaaS company successfully stabilizes its financial structure, enabling growth without compromising its financial health or taking on burdensome fixed debt.
Conclusion
Invoice financing and revenue-based financing provide businesses with flexible, non-dilutive funding solutions that support growth and maintain financial stability. While invoice financing is ideal for companies with delayed customer payments, offering immediate capital based on outstanding invoices, revenue-based financing is better suited for businesses with predictable, recurring revenue streams, allowing for scalable, long-term repayment structures. Each option has its unique benefits and applications, and understanding the differences between them enables businesses to choose the right solution to manage cash flow challenges and fuel their growth without sacrificing ownership or taking on rigid repayment schedules.
Contact us today to learn more about flexible business financing solutions to navigate uncertainty and how we can maximise your company’s access to working capital.
Key Takeaways
- Leveraging revenue to raise capital offers businesses non-dilutive, flexible, and fast funding to support growth while maintaining ownership.
- Invoice financing and revenue-based financing are two examples of funding solutions used to leverage income. Although they both provide access to cash based on income, they are not the same.
- Invoice factoring is a flexible financing option enabling companies to leverage the combined value of its outstanding accounts receivable invoices to build a revolving line of credit.
- Revenue-based financing provides a significant injection of cash with no fixed payments, repaying through a percentage of weekly, monthly, or quarterly revenue until the loan is paid.
- Understanding the differences will better position your company to choose the best of these financing strategies to support sustainability and growth.
eCapital UK
eCapital Commercial Finance (eCapital) is a leading invoice financier providing funding facilities up to £4m to support the growth of SMEs through the provision of flexible working capital facilities. With five fully functional UK regional offices, its local teams are uniquely placed to respond promptly and purposefully to the cashflow needs of its clients. The business has grown significantly since its launch in 2001, providing over £12 billion of funding to businesses. It is majority owned by eCapital, a US based financial services business with interests in the USA and Canada.
