—
This content is for informational purposes only and is not intended to provide financial advice.
Securing financing is a vital element when it comes to covering your start-up costs or expenses for business expansion. Getting loans from banks is quite a hassle because they are generally hesitant to lend or want a personal loan guarantee. There is the option of securing financing from Venture Capitalists or Angel Investors if you can find them. However, they either demand humongous returns or substantial equity. There is the option of revenue-based financing. It can help you avoid the hassles of the previous options for raising capital for your start-up or expansion needs.
The question that may come to your mind is how does revenue-based financing work?
The first thing we need to know, however, is what revenue-based financing is. It is a loan you can take and pay it back from your future revenue. The payment is made over time until a fixed agreed amount is reached. In simple terms, we can say that it is a loan disbursed with the option to pay it back in flexible installments over some time. The amount paid back in every installment depends on the company’s revenue in that period. The amount is decided at a fixed percentage of the current gross earnings. The target amount to be paid back can be 1.5 to 2.5 times the principal loan amount.
When would you seek revenue-based financing?
There are many situations in the business life cycle for your company when you would require money. As we look into financing options, revenue-based financing can come in handy.
- You can look into it if you are a company in its growth stage and need more salespeople. The additional fund can help you increase your workforce immediately. In turn, the revenue would also increase, and you can comfortably pay your dues from this revenue.
- You may be in the process of launching a new product in the market. The financing will help you with the expenses related to the product launch. Once the product is in the market and starts generating revenue, you can use it to repay the amount you owe.
- Similarly, large-scale marketing campaigns can need a lot of money that you may not have. Revenue-based financing can help you in raising the amount. Once you start reaping the benefits of the marketing campaign, you can pay your dues from the boosted revenue.
- There may be a situation when you, as a company owner, may have assets to pledge against loans or have a company big enough to give away equity. Yet, you may not be comfortable with either of these ways of raising capital. Revenue-based financing can help you in such a situation.
How does Revenue-based financing compare with debt financing and private equity financing?
The difference is quite broad because you don’t pledge something of value to secure the loan, as in the case of debt financing. Also, you do not give away a part of equity for the funds like in private equity financing. This is a middle ground between the previous two. The investors do not sit on the board and intervene in the operations. The investors maintain a stake in the company’s growth with the increased revenue.
What are the benefits of revenue-based financing?
- Compared to private equity, this type of financing is cheaper for you. Angel Investors or VCs typically look in the range of 10 to 20 times returns on their investment.
- You will have control over your company because investors will not gain entry into the board and cannot dictate decisions in your company.
- The payments are flexible because they are dependent on revenue as a percentage. So, slow months won’t exert additional pressure as in the case of installments for traditional loans.
- There is no need for a personal guarantee as required in traditional bank loans.
Is revenue-based financing a good option?
Revenue-based financing is a good option in many situations, and overall, it is an effective one too. Certain things can help you service the dues if you choose your options carefully. It can be a perfect solution if your company has a good stream of revenue. Besides, the market in which your company operates should be established and the financials of your company should be in perfect order. These are essential for you to secure financing.
—
