Revenue-based financing (RBF) is an alternative form of financing for businesses that recently gained global popularity. RBF is an agreement where the borrower agrees to pay a percentage of their revenue to a lender until a certain repayment amount is reached. When revenue increases, so do payments. Revenue-based financing combines the most favorable features of debt and equity - companies give up future revenues, not equity, to get flexible payment loans based on the success of their business. This means that businesses can access funding without giving up ownership or control. This can be a significant advantage to entrepreneurs who are looking to retain control over their business.

Unlike traditional loans, RBF is resilient during times of economic distress. Despite the market fluctuations, lenders receive the agreed-upon multiple of the principal loan amount, just over a longer period. In revenue-based deals, borrowers and lenders share the same goals - both want the fundamental business to grow so repayment can be quicker. RBF can be used as a standard one-time loan or as a lines of credit where the borrower can drawdown and repay whenever needed. The primary benefit to businesses for getting lines of credit is they only have to pay back on the funds they actually use keeping debt and interest payments to a minimum while still having constant access to funds whenever needed.

Credit lines combined with flexible revenue-based payments means borrowers are assured that they can take their time to execute on their vision, invest in sustainable growth and product development, and capture unique market opportunities. This boon in business repays lenders faster derisking future drawdowns on credit and letting them reinvest faster for higher ROI, benefits they wouldn’t get with a non-RBF fixed interest rate loan. The mutually advantageous financing structure prevents either party from turning on the other, they succeed or fail together. They’re encouraged to not only grow the company, but to do so in a sustainable way to weather shocks and volatility. Its incentive alignment and coordination mechanisms all the way down.

RBF is most attractive for existing owners of companies that are not yet profitable or have limited assets to use as collateral since normal banks wont touch them. It empowers a variety of organizations like startups, small businesses, art and design oriented services, and businesses with receivables. Many people with limited access to traditional forms of financing such as bank loans or venture capital rely on revenue-based financing to survive. This does usually come at a higher price than traditional financial options though.

On the other side, the target lenders are usually high net worth individuals, family offices, or institutional investors looking for a new asset class to diversify their portfolio. Unlike traditional forms of financing, RBF investments are not tied to the performance of the stock market or other external factors. Instead, investors earn returns by directly tapping into revenue streams instead of inefficient or illiquid markets.

The most critical requirement for RBF is that the business has sufficient recurring revenues. Lenders look for opportunities in sectors that generate revenue and have strong growth potential, such as DeFi protocols or NFT royalties. When evaluating borrowers, lenders consider their business model, governance structure, profit margins, historical revenue, projected earnings and the expected duration of the RBF. There continues to be some risk for lenders but less with the mutually aligned incentive structure.

Debt DAO takes the benefits of RBF a step further by building on transparent blockchains that allow lenders to have unprecedented access to financial data on borrowers and their markets, automate the entire lending process with smart contracts, disintermediate the arbitration and recourse process, add more cryptoeconomic incentives on top of RBFs mutual incentive structure, and trustlessly secure onchain revenue streams with Spigots.

Following the standard RBF agreement but with programmatic onchain payments gives borrowers and lenders access to more automation, risk analysis, and liquidity. Revenue-Share Agreements are a small but integral component to getting DAOs mainstream by giving them the means and incentives to grow sustainable businesses entirely onchain.

DAOs in-particular need RBF because without legal entities they have no capability of accessing banks or most vc funding, they need cryptonative financing options. With the growth of DeFi, NFTs, MEV, and other sectors of crypto, the market is mature enough that revenue-based financing is a viable option for many organizations and, most importantly, it is accessible to them fully onchain too.

How do DAOs actually access Revenue-Based Financing and realize all these benefits? Debt DAO’s suite of products give DAOs the ability for the first time ever to get cash today and repay over time with revenue trustlessly and anonymously. Using an interface like our marketplace app lets you to create a credit account and take out a loan today.