Microcredit VS Revenue Based Financing (RBF)

What is micro credit 

Microcredit is specifically designed for people who have difficulty accessing bank credit and is aimed at creating, taking over or consolidating a business. The objective is to enable project holders to create or maintain their own jobs. 

In addition to the credit, this scheme is accompanied by support for the beneficiaries: support in administrative procedures, help with cost control, business development, etc.

Microcredit is generally offered by associations. For example, Adie offers a financing plan of up to €20,000 via a microcredit (up to €10,000), supplemented by an honorary loan or public aid. 

The granting of a microcredit is based on several criteria: 

• the project leader: motivation, experience, skills, etc.
• the project: location, potential, projected turnover, etc.
• the ability to repay.

What is FBR?

In literal terms, "revenue based financing" is based on the possibilities offered by the subscription business model, which generates a recurring and predictable cash flow. 

RBF relies on the use of the company's future revenues by converting these MMRs into prepayments, thereby freeing up new growth momentum to finance the business in a non-dilutive manner. 

This financing instrument allows the entrepreneur to retain full control of the business and to access the unsecured funds very quickly. 

Once the company is eligible to receive RBF funds, the monthly payment is calculated based on the company's sales . In return, the funder charges a fixed fee that is typically between 4% and 10% of the funding amount. 

Secondly, these financings increase as the company's turnover increases, in order to support the company's long-term growth. This avoids a one-time deal and a large amount of money that cannot be used immediately.

A comparative approach to the advantages and disadvantages of micro-credit and FBR

The advantages of micro-credit 

Low interest rates

Microcredits generally have low interest rates. On the whole of the microcredits, the average interest rate never exceeds 5% in France. Moreover, these credits are between 300 € and 3 000 €, they have a fixed interest rate and a maximum duration of 3 years. The person is accompanied in the management of his budget.  

Little or no guarantees

Another advantage of using microcredit to finance your business is that it requires little or no collateral. With a traditional loan, you will likely have to provide the lender with significant collateral. 

In France, these loans (80% of microcredits) can even benefit from the guarantee provided by the State within the framework of the social cohesion fund.

Quick financing

A microloan is a quick way to get financing. Unlike a traditional loan, you won't have to wait months to be approved since the application process is much faster. 

If you qualify, most lenders will approve your application in less than two weeks.

The disadvantages of micro-credit 

Small amounts

One of the main disadvantages of microcredit is the amount of money it provides. As the name suggests, micro-loans are smaller than traditional loans. While traditional loans can exceed millions of euros, microcredits are usually limited to a few thousand euros. 

Short repayment terms

Another disadvantage of using a micro-loan to finance your business is the short repayment period. Traditional loans can have a repayment term of over five years. In comparison, microloans often have a repayment term of one year or less.

The many restrictions

You may find that some microcredit has restrictions. In other words, the lender may require you to use them for specific purposes, or prohibit you from using them for other purposes.

The benefits of Revenue Based Financing 

Flexibility in monthly repayment

The biggest advantage of FBR is its flexibility. Repayments are based entirely on the company's revenue, so companies never have to worry about not being able to repay their financing providers.

No personal guarantee

A revenue advance requires no personal collateral for the loan, which means you are not risking your personal assets for the good of your business. 

This is a major drawback of other business loans and venture capital investments, which is completely mitigated by revenue-based financing models.

Rapid injection of liquidity for businesses

A revenue advance bypasses many of the steps required to obtain a traditional business loan. There is less due diligence, a quicker evaluation process and no specific personal credit score is required, all of which are necessary to obtain equity financing. 

Easier cash management

Since companies only have to make monthly repayments (rather than daily or weekly payments through their payment service provider), cash flow is even easier to manage!

A data-driven funding model

Because of the flexibility of the repayment structure, revenue-based financing is largely data-driven. 

As a result, most lenders have advanced analytical tools to quickly and efficiently assess their applicants' situations, reducing the possibility of human bias and allowing companies to access financing more quickly.

The disadvantages of Revenue Based Financing 

Not available for companies in the pre-revenue phase

To begin with, your business must generate revenue in order to use revenue-based financing. In other words, revenue based financing is not available for businesses that are not yet profitable.

Note, however, that most FBR companies have minimum monthly recurring revenue (MRR) and operating history requirements. This is the case for Karmen for example, which has set a minimum of only +10K€ of monthly revenue to be eligible.

Size of funding limited by income

While angel investors and venture capitalists can invest millions of euros in pre-seed companies, the amount of RBF funding is limited by your company's revenue.

‍

Why choose FBR instead of microcredit? 

In the light of this comparative study, it is finally relatively simple to understand why the RBF is much more adapted than the micro credit for the financing needs of your digital start-ups or e-commerce platforms. 

With the goal of solving the problem of banks' reluctance to lend to digital businesses without assets, the FBR is ultimately a model that favors all digital businesses. 

In this type of financing, the entrepreneur retains full control of the business and has very quick access to the funds released, which are unsecured. Unlike dilutive financing, such as micro-credits, in which investors take a stake in the company, non-dilutive financing does not provide for a stake in the company. 

While traditional fundraising allows you to free up funds for long-term expenses, RBF allows you to supplement that fundraising with funding for short-term growth transactions, such as acquisitions. 

The bottom line is that FBR is a true lever for growth. Karmen has three offerings based on RBF. The company just raised €50 million in debt.

If you want to start or grow a business, financing is an essential pillar. Revenue based financing is an initiative that frees you from the rigidity of traditional banks and saves you valuable time that you can devote to less time-consuming considerations. 

If you are looking for innovation, speed, non-dilution and transparency to the tedious bureaucracy of a bank loan application, then RBF is for you. 

To use this tool in the best way, trust Karmen who will guide you with passion to get instant cash to grow your digital business.