Revenue-based financing works by a company receives a capital from a lender, as the revenue increases the financing increases in line with growth.
Today we are going to run you through exactly what revenue-based financing is and tell you how it works.
Could it be the perfect financial solution for your business venture? Read on to discover the information you need to know to potentially build your business a brighter future.
What is revenue-based financing?
Revenue based financing is a way for a business to release future payments to the business based on its trading history.
Consider the possibility that there was a third funding option, which would join the best elements of debt and equity financing while at the same time limiting the negatives. Would you be able to have adaptable money with execution connected reimbursements, without for all time offering an offer in your business?
Revenue based financing (RBF) is lesser known yet profoundly inventive third way between conventional debt and equity financing.
The embodiment of it, as the name suggests, is giving financing to a business in return for a portion of its future revenues. Three boundaries are typically concurred forthright close to the total to be given: the aggregate sum to be reimbursed over the long haul, the level of revenue imparted to the supplier of financing, and the payments recurrence. Typically, month to month, week after week or every day.
For instance, if you borrow £25,000, your month-to-month turnover decides your loan term and your payments will adjust to a concurred level of your month-to-month sales.
Consequently, assuming that your turnover is £50,000 for one month and you have consented to reimburse 10% of your month-to-month sales every month, you would pay £5,000. Assuming it goes down to £45,000, you pay £4,500. This proceeds until the concurred sum is reimbursed.
Revenue-based financing definition
A type of business finance that is given to small and developing business ventures in return for a portion of their future revenues. It is regularly considered to be a third funding option that sits between debt financing and equity financing.
Advantages of a revenue-based loan
So, what’s so great about this method of financing? Allow us to investigate the four key parameters – ownership and control versus flexibility and lower levels of risk.
Like debt, revenue-based credits are non-dilutive; you don’t lose a stake in your business, so you keep up with command over its fate. Likewise, comparatively to debt, there’s a decent sum to reimburse, which once came to, releases you of any further commitments. Along these lines, keeping up with ownership and control – check!
Simultaneously, your monthly repayments are directly connected to the performance of your business. They move up and down your revenues making your financing a variable expense rather than a proper expense for your firm. If your sales briefly slow down, so will your reimbursements, making it a decent choice for occasional organisations like lodgings.
Moreover, assuming your sales develop surprisingly fast, your regularly scheduled payments would be higher, and you wind up repaying your revenue loan quicker. This once again displays the high flexibility and low amount of risk involved.
As the last repayment sum is agreed from the start, it may take a somewhat unique outlook to grasp how best to budget. It’s generally rather simple; in this case, the business would simply need to put an agreed 10% of sales to the side to reimburse the development. There’ll be interest on the loan, which can vary.
New funding for SMEs
Revenue-based financing as a product has never been a poster child of finance, yet the design has been utilised for a long time by huge corporations in industries, such as oil and gas, mining, media, and biotech. A couple of years ago a handul of companies arose in the US, which brought revenue-based advances to SMEs for the first time.
Ever since then this method of funding has been increasing in popularity and going from strength to strength. Businesses such as Lighter Capital, Rock and Hammer ventures managed to build multi-million-pound portfolios of revenue advances.
What are some other sources of funding?
Now you are more familiar with what revenue-based finance is. However, to determine if it’s the right model boosting and growing your company; it’s useful to know about more of the options that are widely available today.
Here are some of the other pathways you could investigate when trying to source funding for your small business venture:
- Business Angels
- Venture Capital aka private debt or equity funding
- Crowdfunding aka friends & family
- Enterprise Investment Scheme
- Alternative Platform Financing (government-based or private)
- Stock Market
Depending on the stage your business is currently at, any one of these options may be more suitable than the others.
Elements you should consider include the length of the payback period, interest rate, and level of control retained in the company after securing funding.
Debt versus equity financing
A great deal is made about the positives and negatives of debt and equity financing. Basically, raising debt enjoys the benefit of not weakening existing business ownership and control, while issuing equity does.
Debt comes to the detriment of a higher risk to the business and the owners; the debt must be repaid by a fixed date. If it isn’t, the owners might lose their whole business and possibly more assuming they provide personal guarantees or collateral to support the loan.
Equity, conversely, doesn’t need to be repaid, and on the off chance that the business is struggling, there’s no strain to make regular payments to the investors. During good periods profits are divided between the owners as dividends. This makes equity a considerably more flexible and safer source of financing.
The fortunate business owner who has both options on the table (which is uncommon) must choose what’s more significant and appropriate – adaptability and lower hazard, or ownership and control.
How we could help you
To understand how we could help your business to grow, get in touch with a member of our expert team today. We can offer you advice and guide you towards the perfect financial product for your unique set of business circumstances.
As a leading provider of revenue-based financing, we offer a product called – Merchant cash advance for E-commerce. These are also known as business cash advance; it offers a quick and flexible way of obtaining working capital for your e-commerce online business. The total amount of money you are offered via your loan will be based on your average monthly card sales. This means that the more money you make each month, the more money you will be able to borrow.