July 5, 2022

What would a recession mean for revenue-based financing startups?

Revenue-based financing providers raked in millions from VCs last year for their promise of "founder friendly" alternative financing. But will they remain your friend now lending risk is up?

Amy O'Brien

6 min read

Outfund, which recently acquired smaller rival Clicfunds

Revenue-based financing providers, which offer ecommerce and SaaS startups an alternative to VC funding, have been all the rage in the past few years. 

18 RBF providers have emerged in Europe since 2017 and they raised a record $671m from VCs in last year alone.

But lending to startups is about to get a whole lot riskier. RBF providers are exposed to interest rate fluctuations and rely on their clients seeing strong revenues; when their lending portfolio suffers, they do too. 


Tough times are already biting. Layoffs have started within the sector, smaller players have stopped lending altogether and larger RBF companies tell Sifted they’re on the prowl for acquisitions as valuations drop.

“When we’re at the peak of the credit cycle, it’s easier to get credit and proliferate more esoteric forms of financing and do funkier and funkier types of lending,” Alastair Brown, CEO of Shard Capital Partners, tells Sifted.

“But when the tide goes out and recession hits, we’re going to have a lot of these lenders swimming without trunks. We’ll see a few lending portfolios where we’re thinking, how on earth were they able to build a portfolio with a default rate of this much?”

Is revenue-based financing a risky business?

Offering companies an upfront loan to be repaid as a percentage of future revenues per month — the business model of revenue-based financing — worked pretty well in the good times of 2020, when the SaaS startup market was worth $145bn and annual revenue increased by an average of 78%.

But it’s a riskier business than traditional secured loans, which are backed up by assets as collateral if the debtor can’t pay the loan back. RBF providers have no such collateral if clients default. 

When we’re at the peak of the credit cycle, it’s easier to get credit and do funkier and funkier types of lending

“Unsecured credit is typically the one that’s in trouble when you have a crisis coming because you don’t have anything to back it up,” says Altin Kadareja, CEO at private debt platform Cardo AI. 

“Suddenly your clients’ revenues aren’t ensured any more, and you have no guarantee they can pay you back.” 

Managing the risk

Last week, London-listed VC firm Forward Partners published its 2021 annual results — including those of its RBF arm, Forward Advances. 

Forward Advances' total write-offs reached 8.4% of its 2021 cohort of loans, largely driven by defaults on three unnamed accounts. It attributed this level of write-offs to its rapid expansion and said it had “put mitigations in place to reduce write-off risk going forward” — including strengthening its tech, using new data sources and introducing additional governance measures. 

👉 Read: Revenue-based financing in Europe: The competitors, compared

Although most of the RBF providers Sifted speaks to say they’re not yet seeing defaults rise above forecasts, many say they’re “monitoring the situation closely” as the macroeconomic situation changes.


Clearco, which began providing loans in 2017, tells Sifted that its default rates are actually beginning to decrease — and that having more historical data on companies and the market makes it easier to figure out which clients are worth underwriting. 

Time to rethink

Still, even Canadian-HQ’d Clearco, which is the best-funded RBF startup active in Europe, has been affected by the market downturn. In June it laid off 10% of staff at its European hub in Dublin, just two months after it announced 125 new roles there.

Meanwhile Uncapped, one of the best-funded European-based players in the market, made 26% of its team redundant in May.

One fintech investor tells Sifted that they’ve been put off the RBF model because companies that turn to this type of financing do so “due to a lack of alternatives, so there’s a lot of adverse selection that will become quite unstuck with a recession”.

“Layered onto that, higher interest rates are going to make the model much harder to extract value from the players,” the investor says, pointing to the fact that liabilities will increase.“Their balance sheets will get much more expensive to maintain.”

Other RBF providers are having issues raising enough to provide loans. Investors tell Sifted that a couple of smaller players have already stopped lending altogether as they struggle to raise capital. Those that have managed to raise more recently are looking to acquire smaller, less valuable rivals. 

Outfund acquired Spain’s Clicfunds last year to enter the Spanish market, and Levenue acquired Amsterdam’s Requr in January. Last month, Outfund’s founder told Sifted that it was acquiring a smaller German competitor.

Portfolio diversification

RBF startups loan to businesses which have recurring revenue, which generally means ecommerce or software-as-a-service (SaaS) companies. With consumer spending dropping sharply and startups making cuts, having a narrow portfolio focus could be dangerous.

“Retail and SMEs are closest to where the economic crisis will hit, so we could see some of these companies dislocate their sector strategy towards other sectors,” says Kadareja.

But so far, founders tell Sifted they’re sticking to their guns.

Some RBF providers, like Wayflyer, Clearco, Uncapped, Outfund and ViceVersa, have a lending portfolio predominantly made up of ecommerce companies and, within that, SME retail.

The more you diversify your client base, the better

Others, like Silvr, Karmen, re:cap, Capchase and Vitt, either have a half SaaS or predominantly SaaS lending portfolio.

Silvr, which raised a $20.6m Series A in February, has already split its risk across both categories. 80% of the funding it deploys is split equally between ecommerce and SaaS companies, while the remaining 20% goes to mobile applications. 

“The more you diversify your client base, the better,” cofounder and CEO Nima Karimi tells Sifted. 

Most of Europe’s RBF providers’ loans are designed to be paid off within 12 months, so they're able to shift their portfolio quite quickly.

“If you’ve underwritten the loans correctly and you realise that in the future, a certain kind of company is going to be less profitable, you can simply run your book and get your money back, then choose what the next kind of business you lend to will be,” one investor tells Sifted. 

“But if you’ve got losses in your portfolio, that’s when it becomes a problem. People forget that lending businesses are naturally leveraged. One fuck-up has a tenfold — or even hundredfold — impact on you.”

Do revenue-based financing startups need to pivot?

Revenue-based financing startups may also choose to add adjacent services like inventory financing and data provision. 

Clearco began offering inventory financing at the end of 2020 and also has a kind of matchmaking service designed to make M&A between its portfolio companies easier. 

Uncapped announced plans to move into business banking last May, and hired Revolut’s head of business banking to take it global. But those plans have been abandoned and the company tells Sifted it’s got some product announcements in the next quarter that will be “specifically designed to help online businesses through the economic uncertainty”.

Investors tell Sifted that the fact these companies’ loans are relatively short is what gives them confidence: once the 12 months are up, RBF providers with enough capital can be nimble and pivot to survive. This could mean the RBF market doesn’t do that much RBF-ing in a year’s time. 

“My view is negative on the underlying loans, but it’s not negative on the market as a whole,” says Kadareja.

“While smaller players might disappear altogether, the larger ones will find a way to navigate a changing market environment — that’s the good thing about them being fintechs and not banks.” 

Amy O’Brien is Sifted's fintech reporter. She tweets from @Amy_EOBrien and writes our fintech newsletter — you can sign up here

Amy O'Brien

Amy O'Brien was a reporter at Sifted, covering fintech