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Are you tired of the lengthy application process, high interest rates, and strict repayment terms that come with traditional business loans? Well, there’s good news! Revenue based funding is becoming an increasingly popular alternative for small businesses.
In this article, we’ll explore how revenue based funding works and why it may be a better option for your business compared to traditional loans. Get ready to discover the advantages of this innovative financing solution and how it can help take your business to new heights!
Introduction to Revenue based Funding
Revenue based funding (RBF) is a type of alternative financing that allows businesses to receive capital in exchange for a percentage of future revenue. RBF is similar to equity financing in that it does not require repayment if the business fails, but unlike equity financing, RBF does not dilute ownership or control of the business.
RBF is an attractive option for businesses that are growing quickly and do not yet have the profitability to qualify for a traditional bank loan. It can also be a good option for businesses that need capital for expansion but do not want to give up equity in their company.
Advantages Over Traditional Business Loans
Revenue based funding (RBF) has a number of advantages over traditional business loans. The most notable advantage is that RBF is not based on creditworthiness, so it is available to businesses of all sizes and stages of development.
Another advantage of RBF is that it is a flexible form of financing. Businesses can use RBF to finance one-time projects or ongoing operations. And because RBF is repaid as a percentage of revenue, businesses only have to make repayments when they are generating income.
Finally, RBF can be a more cost effective form of financing than traditional loans. Because there are no upfront costs or interest payments, businesses can save money by using RBF to fund their operations.
Potential Disadvantages of Revenue based Funding
There are a few potential disadvantages of revenue based funding when compared to traditional business loans. First, because RBF is a newer type of financing, there may be less lenders offering it as an option. This could lead to higher interest rates and less favourable terms if you do not keep up with repayments.
Second, because RBF is linked to your company’s revenue, if your revenue decreases, so does the amount of money you can borrow. This could create financial difficulties if your company experiences a slow period or unexpected dip in sales.
Finally, RBF typically has shorter loan terms than traditional loans, which means you’ll need to repay the loan more quickly. This could be difficult if your company is still growing and not generating a lot of profit yet.
Who Can Benefit from Revenue based Funding?
RBF can be used for a variety of purposes, including working capital, inventory, marketing, or expansion. It can also be used to finance receivables or bridge the gap between invoices and payments. Essentially, RBF can be used for businesses where having access to additional capital would be helpful.
Seasonal Businesses:
A seasonal business, such as a ski resort or a beachside restaurant, may experience stark variations in income throughout the year. Revenue-based loans can be of great assistance to these types of companies due to their repayment scheme based on the revenue gained during peak season rather than a fixed monthly payment. This helps them handle their cash flow in lull periods while giving them access to fundings necessary for an upcoming lively season.
Subscription Based:
Subscription based businesses, such as those offering software-as-a-service (SaaS), typically have a steady and anticipated flow of income. This makes them ideal for revenue based loans, where they can borrow money based on a portion of their sales. With this type of financing, SaaS companies can bypass the burden of fixed regular payments which can be hard to meet when their cash flow varies. Moreover, RBLs also allow them to finance growth plans like expanding their product line or launching promotions to bring in more customers.
There are numerous other business models which can take great advantage of revenue based funding, and it’s always worth seeking financial advice from an expert if you have reached the point of wanting to secure a loan, but are unsure which might be best.
How Does Revenue Based Funding Work?
In traditional business loans, the lender provides a set amount of funding upfront, which the borrower then repays over time with interest. Revenue based funding works differently in that the lender provides funding based on a percentage of the company’s future revenue. The borrower pays back the lender with a portion of their future sales, until the full amount plus interest is repaid.
As we have touched down on already, revenue based funding can be great for businesses that are growing quickly and do not yet have the profits to qualify for a traditional loan. It can also be helpful for businesses that need flexibility in how they repay their loan, since repayment is based on sales rather than a set schedule.
One downside of revenue based funding is that it can be expensive, since the borrower pays back more than the original amount borrowed. For example, if a company borrows £100,000 at a 20% rate, they would need to repay £120,000 over time. This means that revenue based funding may not be right for companies that are already struggling financially.
Before taking out any type of loan, it’s important to understand all of your options and compare them to find what’s best for your business. If you’re considering revenue based funding, be sure to talk to multiple lenders and compare rates and terms to get the best deal possible.
Alternatives to Revenue based Funding
If after looking over the revenue based options you found it was not ideal for your business structure right now, it is still worth looking at other loan options before scrapping your plans to expand altogether.
Traditional Bank Loans:
Obtaining a traditional bank loan can be difficult for new businesses, however those with good credit, collateral and a well structured proposal may find this to be a viable option.
Business Credit Cards:
Business credit cards can be a viable source of funding for start-ups, and should be utilised properly. It’s important to note that revolving lines of credit are obtainable from such cards, but only if taken advantage of responsibly – paying the balance in full each month is the best way to avoid costly interest rates.
Crowdfunding:
Crowdfunding platforms like Kickstarter and Indiegogo provide a unique opportunity for start ups to accumulate the capital they need. Developing an effective marketing strategy is essential to ensure success in this endeavour, as rewards or equity can be offered in exchange for donations.
Parting Thoughts
Revenue based funding has been a valuable tool for businesses looking to get the capital they need without taking on debt. From its flexibility and speed of access, to its lack of personal liability and more affordable rates, revenue based funding is an attractive choice for entrepreneurs who are in need of quick financing.
For those who are uncomfortable with borrowing traditional business loans or just want another option, revenue based funding may be worth considering as an alternative form of financing.
