Definition and function of revenue-based financing Revenue-based financing is an innovative form of financing in which companies receive capital from investors and in return transfer a fixed percentage of their future sales to the investors until an agreed amount is repaid in full. This form differs considerably from traditional credit models, as no fixed interest or repayment schedules are agreed. Instead, the repayments are flexibly adjusted to the company’s sales performance, so that the burden is reduced accordingly in phases of weak business development. This form of financing is particularly suitable for young and growth-oriented companies whose cash flows are still unpredictable or volatile. Investors accept a higher risk, but in return receive a potentially higher return if the company grows successfully.

Legal implementation through profit-participating loans and silent partnerships Legally, revenue-based financing is often implemented in Germany via so-called profit-participating loans or atypical silent partnerships. The profit-participating loan is regulated in accordance with Section 488 of the German Civil Code (BGB) in conjunction with individually structured participation agreements. In this case, the lender participates in the turnover or profits of the company, but without having any say or control over the company. Alternatively, the participation takes the form of atypical silent partnership shares which, in addition to the turnover-based repayment, can also include a share in the company’s profits and, if applicable, losses. Both types of contract require careful legal structuring in order to ensure a clear distinction from equity instruments and traditional debt financing.

Key contractual components and regulations The financing agreements must clearly stipulate what percentage of turnover is to be paid, how often payments are to be made and what maximum amount (repayment cap or multiplier of the capital invested) is to be repaid in total. Repayment amounts of between 1.5 and 3 times the original capital invested are common. In addition, agreements must be made on the obligations of the financed company to provide evidence and information, as well as termination and adjustment options. Particular attention should be paid to clauses on the calculation of turnover in order to avoid disputes and subsequent legal uncertainties.

Differentiation from usury (Section 138 BGB) and immoral contracts As revenue-based financing does not generally include a fixed interest rate, this form of financing is not directly subject to the statutory provisions on usury control in accordance with Section 138 BGB. However, the agreed revenue share must not be grossly disproportionate to the service provided, otherwise there could still be a breach of public decency. Courts examine in particular whether the investor is passing on the business risk almost entirely to the company in an immoral manner or whether the agreed repayment terms could significantly overburden the company financially. Careful legal advice when drafting contracts is therefore essential in order to rule out legal risks.

Advantages of revenue-based financing for companies Revenue-based financing offers considerable advantages, particularly for young and growing companies. The flexible repayment terms protect liquidity and cash flow, as less capital automatically has to be paid out during periods of weak sales. In contrast to equity financing, there is no dilution of company shares and founders retain full entrepreneurial control. Compared to traditional credit models, the usual collateral and fixed interest charges are often not required, which makes it easier to raise capital. This makes revenue-based financing particularly suitable for companies with volatile or difficult-to-predict sales trends.

Risks and challenges with revenue-based financing Despite the advantages, there are also potential disadvantages and challenges with revenue-based financing. In particular, there is a risk that companies with strong growth will have to make significantly higher repayments than with traditional credit models, which can be more expensive in the long term. There is also a risk of disputes regarding the exact calculation of revenue and the resulting payments. This form of financing is also riskier from an investor’s point of view, as it is heavily dependent on the actual development of the company and does not receive any collateral in the traditional sense. Companies should therefore carefully examine whether revenue-based financing fits in with their financing strategy in the long term and carefully draft contractual arrangements to minimize risks.