There are different ways you can obtain the capital you need for your business including debt financing, bank loans, and equity financing. The one that will be best for you will depend on your business model and revenue. If your business has consistent, monthly revenue streams, the best option for you will be revenue-based financing.
Revenue-based financing, sometimes referred to as royalty-based financing, is a loan in which repayments are based on percentage of the borrower’s monthly revenue rather than a fixed amount. The payments depend on the financial performance of the borrower because they are not fixed each month, they go up when business revenue is strong and go down when its low.
Revenue-based loans start at around $50,000 and can go up to $3 million depending on the lender. Repayments are typically one to three times the amount that is borrowed which is agreed upon at signing.
Revenue-based financing is similar to equity financing because the capital that you receive comes from investors or a financing firm, like a venture capital firm, rather than a small business lender such as a bank. The difference is that investors that provide revenue-based financing do not have ownership in the business.
Revenue-based financing is also similar to debt financing because you are receiving an advance of capital that needs to be paid pack in a series of payments. The difference is that you do not pay interest on an outstanding balance or make fixed payments.
There are fewer regulations to revenue-based financing in comparison to traditional debt financing. Revenue-based financing does not require collateral or a personal guarantee.
Since the structure is flexible, payments are made until at least one of the following happens:
If your business has high gross margins or is subscription-based or technology companies that have consistent revenue, revenue-based financing is best for you. Regardless of the industry you are in, it depends on your current situation.
The following are examples of the best fit for revenue-based financing:
Just like with every loan, there are some requirements you need to understand so you can determine if you will be eligible for this type of funding. Each lender will have different requirements but typically will have the following:
There are several advantages to revenue-based financing such as:
Although there are several advantages there are also drawbacks to this type of financing such as:
Revenue-based financing is appealing for startups, but you see that there are specific requirements you need in order to qualify for funding. Now that you have all the information you need you can determine whether this type of financing is going to be the best for your business.