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REVENUE-BASED FINANCING
It’s not always easy to secure financing to cover startup costs or support your business’s continued growth. Banks can be hesitant to lend money, and not everyone knows venture capitalists or angel investors.
So, what can business owners do? And, how can they find funding for their business without losing equity or acquiring crippling amounts of debt?
With the support of lenders who care about you and your business, businesses can find a variety of funding options that fit them and their needs.
One example of funding is revenue-based financing. Let’s explore the ins and outs of this funding option.
WHAT IS REVENUE-BASED FINANCING?
Revenue-based financing is the best middle-of-the-road option between conventional bank loans and the high-risk game of private equity investments.
This funding option is a loan that a borrower agrees to pay back over time by promising a percentage of their future revenue to the lender or financier until a set and fixed dollar amount is reached.
Unlike other funding options, like loans or lines of credit, revenue-based funding has no fixed monthly payment or maturity date since revenues fluctuate. Instead, businesses will owe higher repayments when they experience high revenues and lower repayments when they experience lower revenues.
This is a great option for businesses with established revenues who may lack personal or business credit history and need funds for marketing efforts, inventory, and quick cash injections.
PROS AND CONS OF REVENUE-BASED FINANCING
More accessible - Since revenue-based funding loans are underwritten to the future revenue of a business, they are not dependent on a business’s cash flow, personal assets, or personal credit. This also means that more types of businesses and business owners can qualify for this funding option, especially if they don’t qualify for more traditional financing options.
Owners maintain control - Revenue-based lenders and investors do not take any shares or equity. As a result, business owners maintain their ownership, control, and direction for their business.
No collateral required - Revenue-based financing does not require borrowers to put forward personal guarantees or collateral against the loan, once again making it a less risky option for business owners.
Future financing optionality - This type of funding allows borrowers to grow and become more established as an owner and business. By taking the time to build traction with revenue-based funding, businesses make other forms of financing more attainable.
Revenue required - Since this type of funding is revenue-based, start-ups needing revenue to get started are not a good fit as lenders want to see a certain minimum amount of monthly revenue.
More expensive than traditional loans - Business owners should try to compare the repayment amounts of revenue-based funding versus the interest rates on traditional loans.
Best for short repayment periods - This funding option is best for short-term initiatives to drive revenue. But, if you feel your repayment period will last for longer than a year or you have high monthly expenses, you should consider fixed-term lending options.
IS REVENUE-BASED FINANCING BEST FOR YOUR BUSINESS?
Revenue-based financing places owners at lower risk if their business fails and provides more flexibility since repayment is determined by actual revenues. It’s for this reason that many small to mid-sized businesses that can’t obtain more traditional forms of capital seek out this funding option.
So, if you have established a revenue stream to draw debt service payments, a relatively stable market, and can prove your financials are in order through summaries of debt, revenue, operating expenses, and future projections, you should consider revenue-based funding.
However, in the long run transaction costs can end up costing you more, so consider that at the end of the day it’s still a loan and you will be required to pay.
HOW TO ACQUIRE REVENUE-BASED FINANCING
Obtaining revenue-based funding can happen in three easy steps:
- Sign up with a revenue-based finance provider and connect your business’s financial accounts so that they can see your financial history and determine your eligibility.
- Once approved, you can choose the offer. Providers charge a flat fee and a monthly revenue share.
- As discussed, repayments are made as a percentage of the monthly revenue. Slow months will slow down your repayments while lucrative months will lead to you repaying the loan more quickly.
With Yardline, our revenue-based financing options have lines from $5k-20mm, rates from 12-30% APR, and is our most flexible repayment option.
With one, simple application, you’ll receive access to a suite of funding solutions, including revolving lines of credit, small business loans, business and personal credit cards, SBA loans and so much more. Plus, we’ll be there to discuss your options and get you the funding you qualify for (from $5k to $20 million) in as fast as 24 hours.
Apply for funding with Yardline today with one, simple application and get some of the best rates and terms to meet your business funding needs in as fast as 24 hours.
