An Example-Aided Explanation of How Revenue-Based Financing Works
Have you ever thought about the possibilities if you had a third financing option which could combine debt financing and equity financing’s best features while minimizing their downsides? For instance, could you have more flexible finance which comes with performance-related repayments, which does not require you to give away one portion of your company, so to speak?
Revenue-based financing is a lesser-known product, but it is a very innovative third option that lands between conventional debt financing and equity financing. Thankfully, there are many revenue-based financing companies out there that are willing to help other businesses. Credit based financing is an other option for those who may not be interested in the revenue based-financing route.
As the name implies, the essence of revenue-based financing is getting financing from a company by giving away a portion of your future payments in return. Aside from the amount to be given, three parameters are typically agreed on upfront: the total amount of money to be paid back gradually over a long period of time, the portion of revenue that is shared with that financing provider, and the payment’s frequency.
For instance, if you borrow $25,000, then your monthly turnover will determine your loan term, plus your payments to that provider will fall in line with an agreed-on percentage of your sales each month. As a result, if the turnover of your business is $50,000 for a month and if you have promised to pay 10% of your business’s monthly sales every month, then the amount would fall at $5,000. In the event that turnover does go down to $45,000, you end up paying $4,500. This continues until you pay back the agreed amount.