Things You Need to Know about Revenue-Based Financing Pt 1
Revenue-based financing is a type of business which is essentially a blend of equity and debt financing. By utilizing it, one is able to acquire business working capital in return for an agreed upon percentage of the future monthly revenue of their business so that the loan will never negatively impact a business on a down month when they can’t afford it. The company financing the business firm would claim this amount for such a period by the end of which the principal amount and the repayment charges are paid in full. The number fluctuations in percentage or can stay static depending on the agreement.
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.
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.