Revenue-Based Financing and its Advantages
Revenue-based financing is a type of business financing which acts as a blend of equity and debt financing. Revenue-Based financing allows new businesses to acquire business capital in lieu of a fixed proportion of the business’s revenue share. The firm lending revenue-based finance will take the monthly share until the total amount of business’s debt multiplied with the repayment cap is paid off completely.
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.