Revenue vs Equity Financing: Key Differences- Credilinq

Growing a business arrives with several challenges. Right from finding the right team to hire to choosing the appropriate resources for attracting customers, the list is endless.  

However, irrespective of the industry you operate in, one challenge that is common to most founders is accessing the capital required for growing the business. In this regard, most founders are aware of equity funding, where you dilute a portion of your business ownership in exchange for the funds. However, these days an alternate funding option is available to businesses which have already started generating revenue.  

Revenue-based financing is a type of financing wherein you share a portion of your future revenue in exchange for immediate access to working capital.  

However, before you start your application, it is crucial to understand the difference between equity and revenue-based financing. 

What Is Equity Financing?

Equity financing is a type of financing in which the founding team dilutes a portion of their business ownership and issues stocks. These stocks are valued as per present market conditions before being sold to VCs, institutional or retail investors.  

Depending on the stage at which the business is opting for equity financing, it is either known as an angel, seed, or public investment. For instance, if the business is raising money from public markets, it is known as an initial public offering.  

To process the same, most business issues the following type of stocks.  

Common shares 

Preference shares 

Convertible preferred shares 

Each of these arrives with voting powers, i.e., the authority to advise on best business practices.  

In some cases, the business pays a dividend to stockholders in exchange for the risk they shoulder, as well as to increase the stock price. However, as equity financing mandates the business to dilute ownership, most founders preserve this option for later stages.  

Recurring Revenue Financing

A relatively newer financing option for businesses is revenue-based financing (RRF). In RRF, the business does not need to dilute ownership but rather share a portion of their future revenue to instantly access the required working capital. Also known as recurring revenue financing, this option is most popular among early-stage businesses which have started generating revenue however want to access working capital to extend their runway. One of the best aspects of this type of financing is the fact that it enables the business to instantly access the required capital based on its past revenue.  

Equity vs Revenue-Based Financing – The Differences 

Outlined below are the most significant pros and cons of this funding instrument.

	Equity Financing	Recurring Revenue Financing
How it Works	Businesses need to dilute a portion of their ownership in exchange for the funds. This is typically done through issuing shares which are sold to institutional or retail investors.	The business agrees to share a portion of their future revenue in exchange for working capital. The financier approves the capital amount by analysing the previous revenue transactions of the business.
Ownership	Businesses need to share ownership with the investor to access the required funds.	Businesses do not need to dilute equity & can thus protect their ownership in the business.
Investor Rights	Investors acquire voting rights & can decide on the best business practises to be followed.	Only the business owner has the rights to decide on business proceedings & no rights are shared with the financier.
Repayment	Businesses can pay dividends to stockholders on a yearly basis, however in most cases the investor acquires complete repayment, only when they exit the investment & sells their stake in the business.	Businesses need to share a percentage of their monthly revenue with the financier. This amount is a multiple of the approved capital & varies month to month depending on the performance of the business. The revenue sharing will continue till the total approved capital is repaid.
Liability	The business needs to adhere to the liability terms set out by the investor during the investment round.	The business is only liable to pay the monthly instalment to the financier.

Equity vs Revenue-Based Financing – The Differences 

Recurring revenue financing is best for businesses which have started generating revenue and require instant access to working capital. It helps you effortlessly extend your runway and preserve equity while empowering you with the necessary funds to tackle urgent expenditures such as marketing and inventory spending. Thus, it is best to opt for RRF for scenarios where you can instantly generate revenue and take your business to the next level.  

On the other hand, equity-based financing is best for scenarios where you want to invest in opportunities which will generate revenue in the future. Examples include hiring a new team, developing new technologies or expanding to a new market. Although equity financing requires you to dilute a portion of your ownership, it gives you access to greater capital and does not require you to make immediate repayments, making it ideal for long-term growth.  

Now that you are aware of the differences between equity and recurring revenue financing, which one would you choose for your business?

Need help choosing, get in touch with us today.