For any small business, financing is crucial to a company’s growth chart. Aligning the business goals with the right type of funding is where most small businesses struggle with. One of the financing options that most small businesses tend to opt for is revenue-based financing (RBF) or revenue-based business loans. There are many advantages with other funding options, too, but what works for RBF is its non-dilutive and flexible repayment features.
However, it might not be the right fit for every small business. If you are just starting out with your business, this might not be the funding for you. That’s why, in this article, we will discuss RBF, share some insights and tips so that you can decide whether this is the funding you want to apply.
What is a Revenue-Based Business Loan?
In layman’s terms, RBF is a type of alternative funding method which offers capital in exchange for a percentage of company’s gross revenue. Most traditional bank loans levy fixed monthly installments that may make it difficult for businesses with fluctuating monthly revenue to repay the loan during lean periods. So, the repayment is proportional to monthly income earned, which does not put a strain on a firm’s regular cash flow. It differs from equity financing too as it does not require borrowers to dilute their company’s equity. Rather, lenders receive a percentage of the business’s monthly revenue on an ongoing basis.
This financing option is often processed faster than traditional bank loans, making the required capital available within days. This is perfect for businesses with urgent capital needs. Another feature of RBF is that it does not require collateral to get the funding, making it easier for firms without significant assets to seek necessary funds. It is also less restrictive than traditional bank loans, which allow businesses with low credit scores or substantial assets to get funding without a lot of trouble.
Why Would a Small Business Use RBF?
Most small businesses face fluctuating cash flows, making them not the best applicants for traditional loans with fixed monthly payments. That’s where revenue-based financing comes into play. It provides a financing solution to small business owners and entrepreneurs to get the funding required and repay it with a percentage of their future revenue. This flexible repayment structure allows businesses to pay only more during months with high revenue and less during slow periods. This flexibility also ensures that companies do not strain their cash flow and have steady working capital whenever required. This flexibility also makes it a far less risky option for both the lender and the borrower.
Benefits of Revenue-Based Business Loans
There are multiple advantages to opting for a revenue-based funding option. Let’s check a few of them:
- Flexibility in Repayment: The major benefit of opting for RBF is its flexible repayment structure. Since there is no fixed repayment amount, it becomes easier for businesses to repay the loan even during those periods when the income is low.
- No Equity Dilution: Unlike equity financing, RBF does not require business owners to give up any share of their company. This feature makes it popular with entrepreneurs wanting to retain complete business control.
- Fast Access to Working Capital: Lenders specializing in revenue-based business loans often provide a quick application process. This allows small businesses to receive funding typically within 24-48 hours, making it a good choice for companies needing capital urgently.
How Revenue-Based Business Loans Work
Here is a quick outline of how the RBF process works:
- Application: Application for the funding solution starts with businesses submitting documentation on their monthly revenue, credit score, and overall financial health.
- Approval: Once the lender thoroughly assesses the documents, an initial estimate or amount is offered. If the applicant agrees to the amount, submits all the final paperwork, and signs the agreement, the agreed-upon funding amount is disbursed.
- Repayment: As RBF repayments are made as a percentage of monthly revenue, it allows businesses the flexibility to pay higher repayment amounts during months with higher revenue, and in months with lower income, they pay a lower repayment amount.
Why Choosing a Right Lender Is Important?
Selecting the proper funding for your business is not enough. It is absolutely crucial to choose the right lending partner, too. Businesses must compare key elements such as funding amount, minimum credit score requirements, repayment terms, and other additional fees.
Let’s look at some of the online lenders who offer revenue-based business loans and check their basic requirements:
1. Biz2Credit
- Funding Amount: Up to $6 million
- Minimum Credit Score: 575+ FICO score
- Repayment Terms: Biz2Credit charges a percentage of monthly revenue.
2. Square Capital
- Funding Amount: Up to $350,000
- Minimum Credit Score: Not specified, but businesses must use Square for payment processing.
- Repayment Terms: Automatic deductions from daily sales make it easy to manage payments and align them with cash flow. Borrowers have to pay their minimum amount every 60 days.
3. PayPal Business Loan (PayPal Working Capital)
- Funding Amount: Up to $200,000
- Minimum Credit Score: Not stated
- Repayment Terms: The applicant must make a minimum repayment every 90 days.
Conclusion
For small businesses and startups looking for a flexible funding option to balance their fluctuating monthly income and fuel their business growth, revenue-based business loan is perfect as it eases the burden on fixed monthly payments. But just because it offers flexibility, it has its disadvantages too. Since it is based on revenue, this funding option is not for all new small businesses. Also, keep in mind that RBF can be more expensive than traditional loans, and if your business has high monthly expenses, you might want to skip this financing option. It is important that as an applicant, you understand all the aspects of this loan before you apply for it.
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