Revenue based financing is a flexible approach to finance your business growth. It does not require ownership dilution, fixed payment terms, and collateral.
Further, it’s scalable in line with business revenue. For instance, the funding size is expected to be larger if business revenue is higher and vice versa.
This mode of financing is also called royalty-based financing; the repayment is made through gross revenue earned by the business in the future.
It’s done by setting a certain percentage of revenue to be repaid, so if gross revenue is higher, repayment will be higher, and investors will be able to recover their dues fast. On the other hand, if gross revenue is lower, it will take longer for investors to collect their dues.
The repayment amount is predetermined or agreed in advance; it’s fixed in multiple of an original amount disbursed by the lenders. Hence, there is no interest on the outstanding dues and the amount to be repaid is fixed in advance/predetermined.
It’s important to note that repayment is not dependent on the business profitability. Hence, it can be an equally suitable funding option for businesses with lower profitability; even loss-making companies can raise the finance. However, they are required to show stable revenue earned in the past. Similarly, forecasted revenue backed by logical and plausible grounds can be acceptable.
Advantages To Revenue Based Financing
Following are some of the major advantages associated with revenue-based financing.
- It’s highly flexible regarding approval and criteria to qualify for the loan. Flexibility refers to the fact that the size of a loan varies with the change of revenue size.
- There is no need to worry about business profitability to get loan approval. However, stable gross revenue is required.
- This source of financing is cheaper than equity as there is no control dilution, and ownership is not diluted.
- In revenue-based financing, investors are not given seats as a board of directors. Hence, founders and co-founders can lead the company towards achieving business vision and goals.
- Approval of conventional loan requires a personal guarantee from founders and co-founders. So, it exposes their assets to the risk of default. On the other hand, revenue-based financing does not require a personal guarantee. Hence, the personal assets of the business founders are not at stake.
- The borrower does not have to worry about repayment because repayment is only made if revenue is earned. Hence, revenue-based financing can be an excellent way to finance seasonal businesses. However, a proven track record is needed in such as case.
- The time of financing approval is comparatively lower than pitching your product/services to the angel investors and venture capitalists. It can take months and years to complete the financing process. On the other hand, revenue-based financing is easy, fast, and convenient.
- There is a goal alignment between lenders and borrowers regarding business and revenue growth. It’s because both of these want the business to flourish and expand. Hence, more financial prosperity and synergy can be expected with revenue/royalty-based financing.
Possible Disadvantages To Revenue Based Financing
Following are some of the disadvantages of revenue based financing.
- The size of loan approval is dependent on the revenue stream. So, startups at the initial stages may not be able to qualify for such financing.
- Monthly repayments need to be made for the loan. Sometimes, there can be limited margin and managing regular cash outflow can be challenging. However, comprehensive financial planning can help manage repayment aspects.
- Overall, size of checks provided by revenue-based financers is smaller than venture capitalists. It’s mostly because financing is based on revenue, and certain sustainability is expected. Although, revenue based financing can be made in rounds to tackle increasing demand with growth.
When you should opt for revenue-based financing
It can be an excellent move to opt for revenue based financing in the following circumstances.
- Your business is growing rapidly and you are confident about increasing revenue size.
- You need to finance sources that directly impact revenue. For instance, you may need to purchase inventory or incur marketing expenses.
- You need to raise flexible finance without compromising on equity stake. Further, you are not willing to opt for a personal guarantee.
- Your business has sufficient funds to meet working capital, and you have certain expansion plans that will bring additional revenue and profit for the business.
- You have received certain massive sales order. However, lack of financial resources for sourcing material, labour, equipment, and other production factors.
- You have made an initial investment in a startup, and it’s reserved as a runway to meet financial working capital needs. However, your business needs some extra cash to grow.
Is a higher credit score required to raise revenue-based financing?
No, credit score is not an important factor in determining your eligibility for revenue-based financing. In fact, it can be a good idea to apply for revenue-based financing if you don’t have success with conventional financing facilities.
Specialty capital can be an excellent partner to raise funds at a better rate and payment terms. Further, our financing process is quick, transparent, easily accessible, flexible, scalable, and based on our vision to facilitate businesses with the money they need to grow.
Revenue-based financing is also referred to as royalty-based financing. It’s flexible, easy to raise, scalable with revenue, and does not require a personal guarantee of the founder of confounders. Likewise, no asset is required to be given as collateral.
So, it can be a good idea to finance business growth with revenue-based financing. In addition to this, this mode of financing is cheaper than equity, aligns borrowers & lender goals, and can be raised in rounds as and when needed.
Specialty capital is a credible and reliable funding platform that has been helping hundreds and thousands of business owners to achieve their success. Yes, we fuel your capacity to expand and reach financial destination.