Revenue Based Financing

2022-05-09

Chad Cohen

 

Table of Contents

 

Considering financing options for your small business or startup? It’s likely you’ve already looked at more traditional business loans, like debt financing and equity-based financing. But if you’re experiencing strong revenues and wish to avoid putting your equity on the line or sticking to a rigid repayment schedule while raising capital, revenue-based financing may be a preferable option for you.

 

What is Revenue-Based Financing?

Revenue-based financing, also known as royalty-based financing, is a financing model in which businesses secure capital from an investor in exchange for a portion of the business’s monthly revenues. Usually, this amount will be a fixed percentage of the business’s revenues.

Naturally, that means that the business will pay more on months when generated revenues are higher, and less when revenues dip. This makes revenue funding optimal for business owners with strong—but fluctuating— gross revenues, or those with highly predictable revenues.

An increasingly popular form of funding, revenue financing is especially popular with tech companies and B2B software-as-a-service (SAAS) companies in particular, as such companies often have subscription-based sales.

Before we delve further into the pros, cons, and eligibility requirements of revenue-based lending, let’s look at the differences between revenue loans and equity or debt-based loans.

 

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Revenue-Based Funding vs. Other Forms of Funding (Debt and Equity)

As mentioned above, revenue financing differs from both equity financing—including venture capital, growth capital and angel investing—and debt financing in notable ways.

Unlike traditional debt financing loans, which typically require fixed monthly payments and a set interest rate, revenue-based investing doesn’t accumulate interest. While the amount you’ll repay for a revenue loan may vary month to month, the percentage you’re paying won’t.

Funding that you receive from venture capitalists or private equity or angel investors, meanwhile, will entitle those investors to partial ownership. Equity financing offers the advantage of a lack of monthly payments, but it also means that you’re committed to forfeiting a portion of your equity, and therefore perhaps forfeiting some of your control over your business.

 

Pros and Cons of Revenue-Based Funding

Revenue Based Financing
Revenue loans offer many advantages over traditional debt loans and equity financing, but they’re not for everyone. If you’re considering increasing your cash flow with revenue-based loans, you’ll want to consider the following advantages and disadvantages.

Advantages:

  • Zero loss of ownership, unlike with equity financing.
  • No collateral required which may not be the case with traditional loans.
  • Non-rigid repayment business debt schedules (unlike debt financing loans).
  • Repayment term becomes shorter if your revenues increase.
  • Immediate cash flow increase compared to venture capitalist funding, etc., which may take longer to secure.

Disadvantages:

  • Generally requires a track record of high revenues. Revenue-based lenders will want to see that you’ve got a history of strong gross margins in order to ensure you’ll be able to make sizable repayments.
  • Typically provide a smaller capital amount than other investment types.
  • Cuts into your gross margins as it requires monthly payments (unlike equity financing).
  • Higher cost of capital than certain other financing types.

 

Who Should Consider Revenue-Based Lending?

With the pros and cons of getting a revenue loan listed above, one could say it’s a financing option best suited for established companies that have a steady revenue history and aren’t worried about where revenues will be coming from in the future.

That’s not to say that businesses with inconsistent revenues over the course of the year can’t benefit (such as those with seasonally-fluctuating revenues), but revenue-based financing firms will generally want to see evidence of guaranteed revenues going forward. As stated above, businesses that operate on a subscription model (like SAAS companies) are also great candidates for revenue funding.

 

Is Revenue-Based Investing My Only Alternative Lending Option?

What is Revenue-Based Financing

 

Sold on revenue loans but not sure you’d qualify? Revenue-based financing isn’t the only alternative financing to traditional bank loans and equity financing.

At Credibly, we offer a range of small business financing options that suit a range of needs, including for business owners who don’t have a track record of solid gross revenues or an especially high credit score. 

All of these funding options can deliver almost instantaneous cash flow (in as little as 24 hours from the time of approval) and include:

  • Merchant cash advances (MCAs), which lenders like Credibly will approve based on your projected future revenues rather than solely on your credit score or your past revenues. Similar to revenue-based financing, MCAs are tied to your receivables, as they allow lenders to purchase a percentage of your company’s credit and debit card sales.
  • Equipment financing, which allows business owners to purchase equipment which then itself becomes the collateral for the loan.
  • Invoice factoring, which involves selling your unpaid invoices to the lender—a great option for businesses that suffer cash flow interruptions as a result of having to chase down clients.

Making sense of the many funding types available for small businesses can be confusing. Pre-qualify with Credibly today to discover which funding options are best for your specific needs and history.

 

No Collateral, No Problem

Who said you can’t get business financing without collateral? Definitely not us!

Talk to a loan expert to find financing options that let you borrow as much as you need and pay at your own pace.

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