Revenue-based financing is transforming the way e-commerce brands fund growth
Online retailers in Australia are discovering a revolutionary way to fund the expansion of their e-commerce businesses as an international concept makes its way Down Under.
Revenue-based financing (RBF) allows companies with predominantly digital payments to draw funds for a fee – without interest – which are repaid via a percentage of future revenue.
Percy Hung is the co-founder and CEO of Choco Up, a Singapore-based fintech company that has recently opened an Australian office. He launched Choco Up after experiencing first-hand the challenges of raising capital for his previous businesses – including brands sold on e-commerce marketplaces.
“I did a lot of research with my co-founder and we started looking at different types of alternative financing. The reason why e-commerce or retailers find it hard to get bank financing is that they don’t have 10 or 20 years of operating history or physical assets like plant or property – both of which banks are seeking.
“We found there’s a huge gap – especially during Covid when a lot of offline businesses pivoted, adopted digitalisation and went online. We saw an opportunity for alternative financing.”
Choco Up partners with at least one major regional marketplace along with payment platforms like AirWallex and Stripe. Vendors on marketplaces can apply for funding directly from the vendor zone of the marketplace, or on Choco Up’s website.
“We focus on data. We plug into your sales data from your Amazon shop or your Shopify store and we run an algorithm to predict how much revenue your business can make in the next six to 12 months. By leveraging the tech and data and all the APIs these platforms provide, we can do the onboarding process seamlessly, improving the user journey and the user experience.
“The algorithm allows us to automatically generate a term sheet. On the qualitative side, we’ll have a video call with them to make sure they’re real people. When this is done – typically within five to seven working days – and once approved, the money will be in their bank account within 48 hours. So we are solving a B2B financing gap that traditionally takes up to three months.”
Funding amounts range from US$10,000 up to $1 million. During the past three years, Choco Up has drawn investments of more than $150 million, all deployed into financing client companies, the vast majority of them e-commerce retailers.
Because Choco Up is using technology to monitor customers’ sales in real-time, it can see if a client is struggling, it might – with client consent – adjust the terms. That explains why its bad debt ratio is close to 1 per cent – far lower than traditional financiers.
Solving retailers’ pain points
B2B financing is very cumbersome and usually a very difficult process with paperwork at the centre, explains Hung. “This is the biggest pain point that we’re trying to solve: to help businesses access easy financing, which is RBF.”
The concept comes into its own during annual sales festivals like Singles Day or Black Friday Cyber Monday – when retailers need funds for marketing to drive traffic and heightened inventory to meet increased demand.
The second pain point Choco Up is out to ease is the repayment process. A retailer who borrows from a bank will be expected to take a loan over a set term and make regular, equal repayments, usually with penalties for early repayments. The RBF option charges a fee – somewhere between 8 to 10 per cent of the amount borrowed – and takes payments according to the retailer’s revenue, automatically deducted by Stripe, AirWallex or other digital payment management systems as customers buy goods. So if turnover is strong and times are good, the funds are repaid quickly, but if there is a seasonal lull in sales, no one is knocking on the door chasing instalments. As a tiny percentage of every sale is automatically deducted, the retailer most likely won’t even notice the repayments are being made.
“So the whole user experience becomes more comfortable. They clear the first tranche of the loan, and then they use a second tranche.”
The third feature of Choco Up is its desire to work with clients – which a lot of lenders or banks don’t do – to help the merchant achieve success. With access to data and AI-driven algorithms, Choco Up can analyse a seller’s performance and recommend changes that might boost sales.
“When a bank gives a business money, it often focuses more on being paid back than partnering with the business and helping it grow,” observes Hung. “For us, because we are additionally integrated into their sales system, into their accounting software like Xero, we can see their bank fees, and we have their buffering data through Google Analytics or Google Ads so we can perform a health check on the business. And when the business is doing something right or doing something wrong, we can tell them and compare it with industry benchmarks because we leverage on data and compare it with open-source data benchmarks”
Such advice could include, for example, if they should work on achieving a higher conversion rate from their homepage, or if they should consider spending a little more money on Google Ads in a specific region instead of just blasting ads locally.
With a presence in several Asian markets, Choco Up is well-placed to assist brands in expanding their businesses across borders.
Hung cites as an example an activewear brand in Singapore. “They wanted to go into Hong Kong, but as an e-commerce designer and business owner, they did not have the capacity. So we lined them up with partners who helped them with business registration, bank account opening, digital marketing, and fulfilment and logistics– all within the same week. We don’t charge them for this service, because for us the agendas are aligned for clients, partners and Choco Up.”
Another Singaporean client is expanding into Australia. “The first thing they need is capital. The due diligence process might take half a year if they raise money through a venture capital company or a private investor. However because we know them and we leverage the data provided by all these third-party partners and platforms, we can run a very simple algorithm within a few days.”
While Choco Up mainly works with e-commerce businesses – because e-commerce is borderless – it also works with traditional retailers. A key condition, however, is that the majority of their turnover goes through digital payment platforms, which in some markets – such as Singapore where some retailers now refuse to accept cash – has become the norm.
“If you are a retailer and you want to open a second location when you raise $100,000 to fund that, you probably lose 30 per cent of your equity to the new investors. But we can come in and provide you with an amount to get kickstarted. We don’t take one single per cent stake in your business.
“We try to do it in such a manner that we still behave like we are an equity partner to help you grow. That’s how we differentiate ourselves from other loan products.
“We don’t see other loan products or banks as competitors because every financial institution or every lender has its own mandate and its own appetite.”
For more information about Choco Up and its new approach to e-commerce funding, take a look at its website here.