Although the idea of giving over a certain percentage of the business profits might seem intimidating, it can be beneficial in many aspects. Below is a quick guide to help you determine whether revenue-based financing would be the right choice for your business.

The Principal Amount and Financing Rates

You can always expect a big loan amount when it comes to revenue-based funding. This is because it is considered a long-term commitment with monthly repayments and financing companies often look forward to building a relationship with startups to offer further support as the business continues to grow over time. 

The financing rate here will be expressed in repayment caps, a figure which is multiplied with the principal loan amount to come up with the final debt value. As revenue-based financing is long-term, the repayment caps usually go from 1.35 to 3.0. The amount is typically determined by the financing company by evaluating both the possibilities and the scope of the business. 

Financing Requirements and Repayment Terms

Most of the financing companies offering revenue-based funding only work with specific types of businesses. This is because financing companies carefully assess the potential of the business before investing in it because they are expecting repayments from a fixed share from its profits. In other words, they calculate the loss percentage well before offering any loan.

As for the repayment terms, the monthly amount would vary depending upon the revenue of the business. For that reason, there are no predetermined repayment terms when it comes to this form of business funding. It is also important to note that financing companies usually require around 2 – 10 percent of the business’s monthly proceeds until the full loan amount is repaid. 

The Benefits of Revenue-Based Financing

The most favorable benefit of revenue-based funding is that you do not need to back the loan with any of your personal assets or collateral. By going with revenue-based funding you also do not have to take the predetermined fund all at once and can borrow the capital gradually as your business grows. 

One of the other main advantages of revenue-based financing is that there is no risk of the dilution of your company. What’s more, as there is no equity loss here, no formal valuation of the company is required either.

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Preparing a solid business plan is the best way to estimate the costs, which you might have to bear in the future. It is recommended to prepare a business plan for at least 3 to 5 years, including financial projections such as the expected expenses and estimated revenue. After you have the details ready, see if you can manage the funds for the expenses or if you would can utilize revenue-based business financing to take care of the needs.

Keep in mind that it could take some time to generate a steady income, so taking cash out of personal resources to balance the business requirements might not be a good idea. Instead, it would be better if you consult with a financing company and explore the funding options for your business. Below are some of the common business startup costs that you should be aware of so that you can secure proper resources to meet them as applicable.

Equipment

The cost of equipment can vary greatly depending upon the type of your startup business. However, you can expect it to be somewhere around $10,000 at the minimum. The best option to deal with equipment cost is to avail an SBA loan or equipment financing.

Incorporation Fees

If you were planning to register your company to make it a corporate entity, you would need to follow the legal process to apply for the federal and/or state licensing or permits. This can incur incorporation costs anywhere between $50 and $300, depending upon the state’s laws and regulations.

Office Space

You can start small and rent an office space instead of buying a property to run your business initially. However, as you would need to spend a fixed amount per month to pay the rent, you should have a reliable resource to meet that requirement. Note that this can range from $100 to $1000 for each employee per month depending on the location and type of office space.

Inventory

If you were planning to start a wholesale, retail, distribution, or manufacturing business, you should have a clear idea of the inventory costs. It is advised not to stock too many products to start, but keep it good enough to meet your customer demands. You might need around 25% of the startup budget for inventory alone, which is why availing a separate inventory financing might be a good idea here.

Office Furniture 

If you were planning to start a services company that needs a typical 9 to 5 office environment, you would need furniture, such as desk and chair, for each of your employees, as well as furniture in the reception area. Although this would vary greatly depending upon the number of employees you are planning to hire, it is an important part of the business startup costs and should not be ignored at all.

Marketing

Promoting your business is quite simple these days with online marketing tools and social media. However, you might still need to spend around $100 to $250 per month on paid advertisements. Besides, you should also consider the costs of marketing materials like signboards and business cards when drafting the business plan.

Office Supplies

Office supplies such as computers, phone, filing cabinets, paper, and printer ink, etc., should also be included in the business startup budget. Although these seem to be minor expenses, the accumulated costs of office supplies can go anywhere from $100 to $1000. Usually, this would be around 10% of your total startup costs, but that would depend upon the number of staffs as well.

Utilities

No matter whether you own the building, or are operating from a rented space, you would need to pay the electricity, water, internet, and phone bills every month. You can estimate the cost of utilities based on the total area of your office space (excluding the internet and phone charges) at $2 per sq. ft.

Payroll

It might take some time to start generating revenue from the business. However, you should always have the proper resources to manage employee payroll from day one. Although the costs are based on the number of workers here, it usually comes around 25% of the total business startup budget.

Insurance

It is very important to protect your company with insurance. This would ensure that you do not have to face any great losses in case of an unfortunate event. The cost of insurance would depend upon the type of insurance you choose as well as the size of your business.

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Hiring a Bookkeeper

A bookkeeper can help you to save time and money, as well as guide you on how to file your taxes. They can identify potential errors in managing and categorizing your asset purchases in time, which can be helpful to avoid incorrect reporting while filing your tax return. Besides, having a bookkeeper on your payroll means you do not have to manage your books on your own, but can spend that time saved on other business roles.

Hiring a bookkeeper has a few downsides to it as well. Firstly, their services are not free of cost; you will have to pay them a fixed salary or as per the contractual terms. Note that their costs are likely to be more if they have more experience in the field. Although it will pay off in the long term, you need to decide how much you can afford for having a bookkeeper to manage your books at present.

Another drawback of hiring a bookkeeper is that you will also need to purchase accounting software. If you are already using one, you might need to train them on using the software if they are not familiar with it. In addition, you are also giving control of your business’ finances to a stranger here, which can be risky at times.

Hiring an Accountant

An accountant can help you to save time and money, as well as guide you in making strategic financial decisions as required. Accountants are experienced in identifying errors in categorizing and managing assets purchases very quickly, which can help to avoid mistakes while filing your tax return and inviting unwanted penalties. If you hire a licensed Certified Public Accountant (CPA), they can also help you to understand the areas where you need to invest and where you do not need to spend anymore. This can effectively help in your business growth.

The main downside to hiring an accountant is that you might end up relying on them too much. Although accountants can help to create a financial forecast to assess the potential risks and gains when planning an expansion, they are not perfect and can make mistakes too. If you rely too much on the accountant and distance yourself from managing the financial side of your business, you could end up losing capital as well. The best way to address this is by scheduling monthly meet-ups with your accountant and review the financial reports carefully.

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