Loan vs. Mortgage

Small businesses looking to secure funds for various business needs such as purchasing equipment, managing inventory, buying a property, or running their daily operational costs can go for a business loan. Some lending institutions might require the loan to be secured against collateral, but it is not always mandatory, and the terms and conditions can vary from lender to lender. Such a funding option can be very beneficial in order to cover any type of unexpected expenses.

Mortgage loans, on the contrary, are required to be secured against any commercial property. The ownership of the property would remain with the borrower, but he/she would have to agree to repay the loan amount in regular installments until the term is completed. Besides, a mortgage loan is approved only if the lender finds the borrower credit-worthy enough to repay the loan, and the property value good enough to cover the amount.

Purpose and Types

A business loan usually opts for the expansion of the business. The borrower does not necessarily need to secure the loan amount with any type of commercial property, especially if approaching online lending for the funds. The loan can be long term, short term, secured, or unsecured. No matter what the type of loan is, online financing would get approved very quickly and can be used for any and all needs of the business.

A mortgage usually opts when a small business wants to acquire, refinance, or redevelop a commercial property such as an office building, a warehouse, a shopping center, etc. Typically, the loan amount would be based on the value of the property put as collateral, with most lenders offering a loan amount that is lesser than the property value. Mortgages can be fixed-rate, adjustable, and reverse type, which need to be secured with collateral.

Rate of Interest

An unsecured business loan can bring into play higher rates of interest when compared to a mortgage loan. That is because it is considered to have a higher risk when the funds are not secured with collateral. Besides, the borrower would need to have a reliable financial history to get the loan approved. Mortgages, as said, would be based upon the value of the property, and if the borrower fails to repay the loan amount, the lender would seize the commercial property put as collateral to settle the funds.

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The possibility of giving away a part of the control of the business to another firm can be intimidating to some businesses. Therefore, they may look for alternate funding sources like non-equity ways of financing as a substitute for revenue based funding.

There are several advantages to the revenue-based financing which are discussed below.

Longer Repayment Terms

Different from many alternative forms of financing, revenue-based financing allow borrowers ample time to pay back their debt. Due to the option of monthly payments available with revenue-based financing, it will be far easier to manage the debt than the other forms of financing. For instance, similar types of financing like merchant cash advances have the same payment structure based on a percentage. However, it requires daily payments in the place of monthly payments. Therefore, revenue-based financing is clearly very easy to manage when it comes to repayment policy.

Larger Financing Amounts

In comparison to related forms of funding, the revenue-based financing firms provide bigger sums of money to businesses in need. In the case of merchant cash advances, borrowers would be able to secure only a maximum of $250,000. However, revenue-based financing is dependent on a longer-term repayment plan. This allows customers to access larger sums of money. Note that the top revenue-based financing firms offer up to a maximum of $2 million in funds.

No Equity Dilution

In case you opt for revenue-based financing instead of the equity financing or venture capital (VC), you will be able to maintain your equity in the company. If you consider VC, you will definitely be handing over a part of the control of your company to the money lending firm. Revenue-based financing companies, on the other hand, only want their money to be repaid, along with the interest. Remember that VC firms offer finances in return for monetary returns as well as control of their company.

Revenue-based financing is a great way to fund businesses, as it brings together the benefits of equity and debt financing. There are other benefits such as longer repayment periods, lack of equity dilution, and higher amounts of money available to businesses choosing to go with revenue-based financing.

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There are several reasons why you should consider the services of revenue-based funding companies.

• Longer Repayment Terms: As opposed to several other financing resources, revenue-based funding offers the facility of longer terms for repayment of borrowed money. This makes things more manageable for the borrower, especially if there are financial constraints involved. Consider merchant cash advances, for instance. This facility requires you to pay a set amount every day, and also follows a percentage-based structure, but with daily payments. Therefore, revenue-based financing is easier and more convenient to repay.
• Larger Financing Amounts: In comparison to other forms of funding, revenue-based funding provides huge sums of money. In the case of merchant cash advances, you can acquire $250,000 of money at maximum. However, revenue-based financing functions on longer repayment terms, and hence involves larger sums of money. Lenders in this category even provide up to $2 million to those in need.
• No Equity Dilution: If you decide to choose revenue-based financing over equity financing or VC funding, you would be able to preserve the equity in your company. If you avail VC services, you are effectively handing over control of your company into their hands. Revenue-based companies only demand money back, along with interest, of course.

The Disadvantages

Some of the disadvantages of revenue-based financing are as follows.

• High Repayment Amount: The cost of capital becomes very high in revenue-based financing. It acts as an extended version of merchant financing, with its giant factor rates. You will take longer periods to repay because payments are made monthly. As a result, the amount you have to pay would become much higher than what you actually borrowed.
• Relatively Slow to Fund: Note that revenue-based funding companies offer funding after a long time in comparison to other channels of funding. These firms may reiterate that they offer quick payments, but this can stretch to 30 days. This period is comparatively longer than the usual industry standards. There are several funding companies which are capable of providing financial assistance within a day of application. Bear these factors in mind before you decide to avail services from revenue-based funding companies.
• No Prepayment Incentives: If the repayment period is longer, the lender presents prepayment incentives. Generally, lenders give these to customers in order to encourage them to pay early. However, in the case of revenue-based financing, no such option is available. The option is very much like an extended merchant cash advance, and there are no bonuses for those who pay ahead of time.

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The prospect of giving up control of their business to someone else is scary for many entrepreneurs, and to get around it, they search for non-equity options of financing as a substitute for VC funding. This often leads them to revenue-based financing. Below is a discussion on how that works.

The Details                                                     

There are four major details regarding revenue-based financing which you need to evaluate in order to determine whether it is the right funding option for your business.

• Rates: The costs incurred by revenue-based financing companies are expressed in terms of “repayment caps.” These are very high factor rates and are multiplied with the principal amount in order to obtain the total amount you have to pay the company back. The factor rate is an integer value between 1.35 and 3 and is high for long-term deals. Effectively, many lenders end up charging their clients double the amount which they borrowed in the first place, or more.
• Amounts: Revenue-based financing is a long term funding option. This means that the amount available is usually larger than you find with alternative options. The funding firms which offer this service generally provide funding from $100,000 to $2 million.
• Repayment Terms: Since this form of funding involves percentage-based monthly returns, there are no fixed terms involved in the repayment of the amount. Monthly-based finances are necessarily related to the monthly revenue, and that will fluctuate every month. In this type of funding, 2-8% of your business revenue would be required to pay the firm back, and the process would continue until the amount was paid back in full.
• Requirements: The majority of revenue-based financing firms are ready to work with only a selected type of companies. The best firms work with fast-growing clients. If you come under that category, you can avail this financing option.

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