When experiencing tremendous growth, a small business can quickly run out of resources to keep up with increasing demands. The logical next step is to seek funding—and that’s where revenue-based financing can come in handy. 

As a rapidly growing business, you need funding that adapts to your company’s changing needs. Find out whether revenue-based financing is the best option for your business. 

What Is Revenue-Based Financing?

Revenue-based financing, also known as royalty-based financing, allows you to pay back loans based on your company’s monthly revenue. 

Unlike a conventional commercial loan with a strict amortization schedule, revenue-based loans don’t have fixed payments each month. Instead, your repayment is entirely dependent on your growth rate and will increase or decrease every month.

Some Characteristics

These revenue-based business loans have a broad range, typically starting at roughly $50,000 and going up to $3 million, according to various lending and financial advisory websites. 

Instead of accruing interest, revenue-based lenders charge a fixed amount for repayment—typically one to three times the amount borrowed. Payment amounts are agreed upon at signing, usually falling between 2%-8% of your monthly income.

To bottom-line it, revenue-based financing is a type of small business loan with payments that fluctuates based on your monthly revenue.

Revenue-based financing is a great way to build a business

Is a Revenue-Based Financing Structure Right for Your Business?

Revenue-based loans are tailored to the success of your business. The faster your business grows, the quicker you can repay and move on. Your most substantial payments coincide with your most profitable months—which means you’ll have lower payments and, therefore, more breathing room during slower months. 

These loans are best suited for businesses with high gross margins or subscription-based models that have consistent, easily forecasted revenue. The most successful of these companies are often software-as-a-service businesses because of their ability to scale quickly. 

However, revenue-based financing could benefit your small business regardless of industry depending on your current situation, such as:

Businesses Too Small for Venture Capitalists

Some small businesses are too small to draw the attention of venture capitalists. Revenue-based lenders, however, usually aren’t concerned with the massive returns that venture-capital investors chase.

If your business has a consistent revenue stream and a sustainable model built for modest growth, a revenue-based loan could be the right fit.

Business Owners Looking to Keep Control 

If your business has growth potential and has been propositioned by venture capitalists, you might still want to shy away from that type of financing. You’ve worked hard to get your business where it’s at and may not want to risk sacrificing your vision or grant control to another entity. 

Revenue-based loans are a potential solution. These loans are repaid directly to a lender, one who doesn’t require the release of an equity stake in your business that venture capitalists demand. 

Businesses Unable to Secure Conventional Financing

If you don’t qualify for conventional working capital loans despite generating stable, recurring revenue, revenue-based financing might work for you. 

Some lenders are hesitant to offer standard funding products if a company doesn’t show a long, strong positive history of creditworthiness. If they do, interest rates can be significantly higher and cause monthly payments to skyrocket. 

Fortunately, revenue-based financing creates many advantages over other funding options if you find yourself in this situation.

What Are the Benefits of Revenue-Based Financing?

There are several positive attributes of revenue-based financing. If you’re looking for a fast, flexible way to expand your business and other options aren’t available, revenue-based funding may be your best bet.

Qualifications Are Easy

Conventional lenders such as banks require high credit scores, high annual revenue and a certain amount of time in business, among other factors. 

Revenue-based financing is based on current monthly revenue and potential growth. As long as you’re bringing in cash now and have a solid business plan for the future, your odds of approval are high.

Repayment Is Flexible

Since the loan repayment is based on your monthly revenue, you can avoid fixed payments that might be too high at any given time. When your revenue increases, so do your payments. If you’ve had a financially challenging month, you won’t be on the hook for more than you brought in.

Funding Can Be Faster

Conventional financing, such as highly sought after SBA loans and venture capital financing, can take months to reach your bank account. Revenue-based lenders can provide funding within a few weeks, making them a good choice for those who need cash to fund projects with an immediate timetable.

What Are the Disadvantages of Revenue-Based Financing? 

As with all small business loans, there are some drawbacks to revenue-based financing. Because they’re repaid a bit different and are targeted at businesses that may not qualify for other options, they come with some riskier terms.

Higher Costs

Conventional business loans use standard interest calculations to determine repayment amounts and give lenders a return on their financing risk. This allows a borrower to potentially reduce some of those costs by paying down their principal faster. 

Much like a merchant cash advance, revenue-based financing has a set amount that must be repaid no matter what. Depending on your business’s creditworthiness and how long you take to repay your loan, you could end up paying 3 times the amount that you borrow.

Uncertain Repayment Periods

Because repayment is based upon a percentage of your revenue, you have no way of telling exactly when your loan will be paid in full. This could work out great if your business takes off and you pay it off in months. But, it might turn into a burden if it takes years to bring in enough revenue to satisfy the loan.

How Do I Get a Revenue-Based Loan?

Since revenue-based financing is considered a niche market, it may be difficult to find a lender. When you do, you need to make sure you have what it takes to qualify for a revenue loan. 

Find the Right Revenue-Based Lender

Banks and other conventional financiers don’t offer these types of loans, so you’ll have to search elsewhere. There are some out there, and many of them specialize or even exclusively offer revenue-based loans. 

Ace the Application

Once you’ve found a potential lender, submit an application online that includes both your business and personal information. They will ask to see your business’s financial documents (balance sheet, profit-and-loss statement, etc.), and may even look at your personal credit score. 

The lender can connect directly to your bank accounts to verify revenue before determining a suitable loan amount and repayment terms. Be ready to provide 3-12 months of business bank statements, plus a business plan for review.

Lenders will try to tell the future of your business before deciding whether to invest

Demonstrate Growth Potential

Generally, your business must have a gross profit margin of at least 50% to qualify for revenue-based financing. Your business plan should include the strategy you’ll enact to grow that revenue and, therefore, pay back the loan.

Specify How You Will Use Funding

Show a lender how you plan on utilizing the loan. They need assurance that the money will be well spent in helping your business grow. Present your plan to indicate just how the loan will be used; marketing and sales are always a great indicator of growth, as well as developing or launching a new product.

Consider Lenders You Want to Work With

If you have multiple options, go with the lender that can best help you grow your business—not just the best deal. Some lenders will even act as mentors, ensuring they recoup their investment by giving you valuable insight. 

If the partnership is mutually beneficial, the repayment process will be smooth and can set you up for an ongoing relationship with the lender.

Don’t Cut Off Your Cash Flow

Do the math. If you can’t afford repayments, revenue-based lending isn’t for you. Make sure your sales and revenue flow is sufficient enough to sustain your business during your repayment period.

What Are My Next Steps?

By now, you should have all the information you need to begin to determine whether revenue-based financing works for your small business. 

If you’re achieving consistent revenue and have plenty of room for growth, they could be the perfect fit for you.

If you’re unsure where your business is headed, or the terms just don’t fit what you’re comfortable with, take a step back and consider your other options. 

Frequently Asked Questions About Revenue-Based Financing

When Should I Look For Revenue-Based Financing?

The best time to look for revenue-based financing is when your business is growing quickly, and your credit is strong. You may also qualify for other financing options, but this is when your odds of approval are the best for a revenue-based loan.

What Happens If I Get Revenue-Based Financing and My Revenue Falls?

When you take a revenue-based loan, your monthly payment is structured as a percent of your revenue. If your revenue falls, the amount of your monthly payment will decline as well. However, this may mean that it takes you longer to pay back your loan.

Who Should Use Revenue-Based Financing?

Revenue-based loans are best for businesses that have substantial monthly revenue and are growing quickly. Business owners should also have strong credit but—for whatever reason—can’t qualify for more cost-effective conventional financing.

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