Revenue-based Financing 101: How a Revenue-based Loan Works
If you run a small business, you’re probably familiar with how much money it can take to get your start-up off the ground. From renting office space to purchasing furniture and equipment, it can be very expensive to get started in the business. Revenue-based financing, or revenue sharing as it’s also called, can be one way you can acquire the capital you need without having to come up with all the money upfront. Here’s how it works.
What is a revenue-based loan?
A revenue-based loan is a type of financing where the lender will fund 100% of the project in exchange for a percentage of the annual revenue from that project. This means no upfront costs or equity contribution from you and it’s not unheard of for lenders to offer 100% financing, up to $250,000. But how does this work and why would someone want to go with this kind of financing model?
1) Unlike traditional bank loans, which require 20%-40% upfront as an equity contribution (a sizeable amount!), revenue-based loans are fully funded by the lender at completion and there’s never an equity contribution required. 2) Revenue-based loans are more suitable for startups who may have less than one year of revenue history but have significant potential to grow revenue fast once they scale their business.
3) The way these kinds of revenue-based loans work is the startup owner needs to submit a plan detailing how much revenue they expect to generate over the course of two years and what expenses they anticipate.
4) Once submitted, this plan gets reviewed by potential lenders on their online platform and if everything looks promising then the startup can move forward applying for funding – receiving 100% financing after their two years’ worth of data has been analyzed!
How do I apply for a revenue-based loan?
There are four steps to getting a Revenue-based loan. First, you’ll need to get your start-up loans approved by your bank or other financial institution. Second, choose the term of your loan and the amount of capital that you want to borrow. Third, identify which funds from operations will be used as collateral for the loan (this includes revenue and/or inventory). Fourth, choose the terms of repayment for how long you want to take on this type of debt and how much interest you want to pay. You can also choose to have revenue-based repayments begin immediately after you receive your first payment or at a certain time point in the future. When deciding what time frame works best for you, consider both short-term and long-term cash flow needs. For more information about revenue-based financing, read more here!
What are the repayment terms of my revenue-based loan?
A revenue-based loan is an extension of your credit line, usually for one to three years. You then repay based on the revenue generated from your business. The idea is that as your business grows and earns more money, you will be able to afford higher repayments. Let’s say you borrow $200,000 and you have steady revenues of $20,000 per year – a typical plan would be to borrow enough to cover expenses (at least $5,000) and set up monthly repayments of between $400 and $800 per month. As soon as the revenues grow by even just a little bit (to say $25,000), then your monthly repayment amount can be bumped up to say $1,250-$2,500. Revenue-based financing makes it easy to meet cash flow needs, without having to go back into debt each time your revenues grow.
Can I get help if I’m not sure how to go about financing my business?
- What is the definition of revenue-based financing?
- Why do lenders prefer revenue-based financing instead of conventional loans?
- How can businesses take advantage of revenue-based financing opportunities?
- What are some common misconceptions about revenue-based financing?
- Are there any risks to using revenue-based financing options?
- Can I use traditional financial collateral, such as property or equipment, to secure a revenue loan? What if it’s in another state or not available at the time of repayment? How does this work for those with unprofitable operations or no real estate assets to offer as collateral in the event their revenues fall short during repayment for their loan?
- A revenue-based loan works differently than a traditional loan because you’re borrowing based on your revenue rather than the asset you have to offer as collateral.
- Your lender will ask you how much revenue your business has generated and how many years you’ve been operating before approving your request for a particular amount up to $250,000 (usually), and charge an interest rate based on that amount;
- A revenue-based loan usually consists of one lump sum payment and doesn’t have any prepayment penalties when it comes due;
- Revenue from your business goes into repaying the interest portion of the debt over time until all principal is paid off;
Common Questions About Revenue-Based Financing
- What is revenue-based financing?
- Why should I borrow on a revenue base? 2.1 Why can’t I just take out equity funding or traditional bank financing to cover my company’s cash needs?
- How does revenue-based financing work?
- Can Revenue-Based Loans replace other loans or funds my business might have otherwise taken out in the past for new acquisitions, debt refinancing, recapitalization and expansion projects, and working capital requirements?
- What are the risks of Revenue Base Financing?
- Who do Revenue Base Finances work best for?