Is Revenue-Based Financing the Right Choice for your Business?
Revenue-based financing is a type of business funding that allows you to acquire resources for business operations in exchange for a fixed share of your business’s future income. You will need to pay the predetermined revenue percentage every month to the financing company until the total loan amount is repaid. The amount is then calculated by multiplying the principal with the repayment cap.
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.