Raising investment funds is one of the biggest challenges a startup will face, according to Forbes Magazine. Banks are often hesitant to lend young businesses money, or they will demand a personal guarantee which most startups do not have. Revenue-based financing, therefore, can fill the void if you are looking for a medium between the high-stakes game played by investors that fund you for private equity and the conventional bank loans.
What is Revenue-based Financing?
Revenue-based financing is a loan with a fixed repayment target where the borrower pays the lender a percentage of their gross or net profit until the lender has received all their money plus a cap similar to interest on a bank or traditional loan.
What are the Advantages of Revenues Loans?
If your business is young with no collateral security to access a traditional loan, you may be able to get a revenue loan, particularly if you can prove you have a consistent cash flow. If you cannot convince investors to input sufficient capital into your business, they may be willing to extend a revenue loan if you have sufficient assets as security. Revenue-based loans are also a plus if you are not ready to give away equity, especially for a small amount of capital. Most start-ups also struggle to meet interests and payment schedules on a traditional loan. With a revenue loan, you will only pay when you make a profit. Consequently, you are less likely to default.
What are the Disadvantages?
The main disadvantage of going for revenue loans is the fact that it is risky and has high-interest rates. The borrower generally pays between 20 to 30 percent of the business's net profits until the principal amount plus other charges have been fully settled. If your company is small and you want to reinvest all the profits back into the business, quick business loans such as revenue loans are tempting and can be a distraction because you have to share your profits with the lender.
When Should I go for Revenue-based Loans?
Quick business loans are not for everyone. You can go for a revenue loan if your business's growth stage requires additional employees quickly and you have no time or ability to access a traditional loan, or neither do you want to sell equity. You can also go for a revenue-based loan if you are in the midst of launching a new product or rolling out an extensive marketing campaign and have no funds, or as a business owner, you do not want to guarantee a loan personally.
Do I Qualify for Revenue-based Financing?
If you are looking for a fast business funding option and choose to go for revenue financing, you must meet certain conditions to be eligible. Your business must have a stable revenue stream from which the lender will draw their payments. Your business should also have an established market that guarantees consistent income. The lender will also expect that you have your financials in order and have proper and accurate records of your debt, revenues, projections, and operating expenses.
Before committing your business to any form of borrowing, ensure you fully understand the long-term obligations you are signing up for. While revenue-based funding may look like it comes with fewer strings attached to the amount, treating it casually is a recipe for disaster. It is, however, a less complex option if you are looking for quick business loans. Talk with a lender for more information.
Share31 July 2017
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