By Nathan Abbington
Revenue-based financing (RBF) has been hailed as a revolutionary funding model for startups and small to medium-sized enterprises (SMEs), especially in countries like India, where traditional financing is often difficult to access. Companies like GetVantage and platforms like Klub, Efficient Capital Labs, and Recur Club offer a seemingly founder-friendly alternative to equity dilution or high-interest loans. RBF provides flexible repayment terms, which align with a company's revenue, making it attractive to startups facing inconsistent cash flow. However, despite its advantages, RBF harbors significant criticisms, which Indian entrepreneurs must consider before committing to this model.
Flexibility or Financial Trap?
At first glance, RBF provides a breath of fresh air to startups, especially those grappling with the fixed repayment schedules of traditional loans. Companies that opt for RBF only repay a percentage of their revenue, offering them a lifeline to avoid hefty repayments during business downturns. This initial relief is particularly beneficial for companies operating in seasonal industries or with fluctuating income streams. However, beneath this surface-level advantage lies a potential financial trap.
While RBF relieves short-term repayment pressure, it often increases cumulative cost over time. Lenders such as GetVantage typically charge a percentage of monthly revenues until the business repays a predetermined amount, usually 1.5 to 3 times the original loan. This repayment structure means that companies may pay significantly more during periods of solid revenue than they would under a traditional fixed-interest loan. The more successful the company becomes, the quicker it repays—but at a much higher premium, ultimately making the cost of capital far more expensive than initially anticipated.
For example, if a company agrees to share 6-12% of its revenue with an RBF provider, such as GetVantage, which charges a 6% flat fee, that percentage can quickly add up, especially for rapidly growing businesses. Unlike traditional loans, where repayment terms are clear from the start, RBF's reliance on revenue performance creates a scenario where companies may find themselves stuck in a continuous cycle of payments, dragging on longer than expected or paying much more than they initially thought.
The Indian Startup Dilemma: High Long-Term Costs
In India's competitive and price-sensitive market, Indian RBFs has aggressively targeted early-stage startups and SMEs. While the platform promises to offer flexibility, Indian startups—especially those operating on slim margins—often find themselves ensnared in an expensive financing trap. The obligation to share future revenue can be a significant financial burden for businesses in industries like e-commerce, consumer goods, and retail, where profit margins are already thin.
For instance, a startup struggling to balance operational costs, marketing expenses, and growth investments may find that the RBF repayments cut deeply into profits. This creates a scenario where companies are forced to sacrifice investments in critical areas like product development or market expansion to service their debt. As a result, startups may become stagnant, unable to compete with rivals who have opted for more traditional, cost-effective financing methods. The flexibility of RBF often comes at the cost of delayed growth and reduced financial agility, pushing businesses toward debt dependency rather than sustainable growth.
Market Volatility and Revenue Fluctuations
India's market is dynamic and unpredictable. Seasonal demand variations, government policy changes, and macroeconomic disruptions—like the demonetization event or the COVID-19 pandemic—create revenue volatility that can wreak havoc on businesses relying on RBF. When revenues dip, repayments may decrease in the short term, but the overall obligation remains. As companies enter periods of low income, they may find themselves in a precarious financial position, with no clear end to their repayment cycle.
For startups that depend on platforms like GetVantage, this can mean paying off loans over an extended period, delaying profitability and investment into future growth. A flexible repayment timeline is necessary to avoid financial uncertainty, hindering long-term financial planning. RBF repayments can be particularly overwhelming for businesses in unpredictable sectors, such as retail or agriculture, where revenue streams could be more stable.
Not Suitable for Every Startup
Another critical area for improvement of the RBF model is that it is not a one-size-fits-all solution. RBF may only sometimes be the best financing option in a country as diverse as India, where businesses range from tech startups to traditional retail and manufacturing. For instance, companies in asset-heavy industries that require significant upfront investment, such as manufacturing or infrastructure, may need help managing RBF repayments due to delayed or unpredictable revenue streams.
Similarly, early-stage startups that are still testing their business models or scaling rapidly may discover that RBF restricts their financial flexibility. While platforms like GetVantage position themselves as founder-friendly, the truth is that for many Indian startups, traditional loans or equity investments—despite their downsides—offer more predictable and manageable financing solutions.
The Debt Trap: Overleveraging and Financial Strain
One of the most pressing concerns for Indian startups using RBF is the risk of overleveraging. Many businesses, particularly those struggling with liquidity, turn to RBF as an alternative to traditional loans. However, as the repayment obligations mount, these startups often find themselves trapped in a cycle of debt. To meet growing repayment demands, businesses may take on additional rounds of RBF or secure other loans, leading to a dangerous spiral of overleveraging.
Instead of focusing on growth or achieving profitability, these businesses are forced to divert increasing portions of their revenue to debt repayments, leaving little for reinvestment. In extreme cases, startups may find themselves on the verge of insolvency, facing financial distress and the need for more external financing to stay afloat. RBF Platforms while offering immediate economic relief, can inadvertently push startups into a vicious cycle of debt that stifles innovation and long-term viability.
Lack of Legal Clarity
RBF's legal and regulatory framework in India must be developed, adding to the risks associated with this financing model. While RBF agreements, such as those offered by GetVantage, can be analyzed under laws like the Indian Contract Act of 1872, no specific legislation governs these transactions. This lack of regulatory clarity leaves businesses vulnerable to potential legal disputes or unfair practices. With a clear legal framework, the terms of RBF agreements may be more transparent and enforceable than those for traditional loans or equity financing.
As the RBF sector grows in India, the establishment of a well-defined regulatory structure is not just important, but essential to prevent conflicts between businesses and RBF providers. Startups must tread carefully when navigating the complexities of RBF agreements, and a clear legal framework will provide them with the security and protection they need until clearer legal guidelines are in place.
Conclusion
While RBF companies in India, like GetVantage and others, offer innovative solutions to the funding challenges faced by the country’s startups, the model carries significant risks that cannot be overlooked. The high long-term costs, coupled with repayment structures dependent on unpredictable revenue streams, can place a heavy burden on businesses. In India’s volatile market, where external factors such as government policy changes or seasonal demand fluctuations can significantly impact revenue, RBF leaves startups vulnerable to extended repayment cycles and increased financial pressure. However, by avoiding overleveraging—a common consequence of relying on alternative financing—companies can break free from the cycle of debt and unlock their potential for growth and innovation.
Moreover, the lack of legal clarity surrounding RBF in India introduces additional uncertainty. Unlike traditional loans or equity investments, which have clear legal frameworks and predictable repayment terms, RBF operates in a gray area, exposing businesses to potential legal disputes or unfair terms. Indian entrepreneurs must exercise caution and take control of their financial future by thoroughly assessing their revenue patterns, market conditions, and long-term goals before committing to RBF. In a highly competitive and price-sensitive environment, the financial strain imposed by RBF can limit a company’s ability to scale, innovate, and thrive. While RBF may seem like a convenient short-term solution, its long-term consequences may undermine a startup’s overall success and sustainability.
About the Author
Nathan Abbington is a UK-based financial-cum-energy analyst with extensive experience in the global financial markets. He specializes in analyzing financial markers, oil and gas trends, renewable energy developments, and the impact of geopolitical events on energy prices.
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