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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