Are you a startup founder searching for funding but want to avoid personal guarantees and giving away equity? Look no further!
Revenue-based financing could be the answer you've been seeking.
In this blog, we'll explain how revenue-based financing works, its benefits, and whether it's a good fit for your business.
Say goodbye to traditional funding models and join us as we explore this exciting alternative. Keep reading to discover a funding option that puts you in control of your startup's destiny.
Let's dive in!
Revenue-based financing is a unique funding approach where companies receive capital in exchange for a percentage of their future revenue.
Rather than relying on traditional loans with fixed terms, repayments are determined by a specific portion of monthly revenue.
For example, you obtain a loan of $250,000 via revenue-based financing and agree to repay at a rate of 8% of your monthly revenue.
Let's say you generate $100,000 in a month with higher revenue.
Based on the agreed percentage, your monthly repayment would be $8,000.
As a result, you will pay off the financing sooner.
However, during a month with lower revenue, for example, $50,000, your monthly repayment would amount to $4,000, reflecting the lower income.
While the repayment amount is smaller, it also means the overall repayment term will be longer.
Unlike traditional bank loans, securing RBF is relatively straightforward.
The investor reviews the business's financial history to get started.
Once approved, the investor and the borrowing business agree on three key points:
Thus, you commit to dedicate a portion of your weekly or monthly revenue towards repayment until you meet the agreed-upon repayment amount.
💡The advantage of revenue-based financing is that it aligns with your business's revenue fluctuations.
It provides the flexibility to adjust repayments based on your company's financial performance, allowing you to navigate through both prosperous and challenging months.
Let's explore the advantages of revenue-based financing (RBF):
✅ You retain full ownership of your business.
Unlike traditional debt financing, revenue-based loans are non-dilutive, meaning you don't have to give up a stake in your company. Thus, you maintain greater control over your business's future and strategic decision-making.
✅ Performance-based repayments.
With RBF, the repayments are directly tied to the business's revenue, ensuring payments reflect what you can afford at any given time.
✅ Flexible repayment structure.
Unlike fixed repayments, RBF offers a dynamic model where monthly repayments scale up or down following the business's revenue. This flexibility allows for more manageable cash flow management, especially during fluctuating revenue.
✅ Affordable interest rates ease the financial burden on businesses and support sustainable growth.
✅ No collateral required.
RBF agreements eliminate the need for collateral or pledging assets. This aspect is particularly beneficial for businesses that may experience slower months, as they are not required to put any assets at risk as security.
✅ Quick and straightforward application process.
Applying for RBF is often faster and more streamlined than traditional loan agreements. Once you sign the necessary documents, you can quickly access the capital, typically within 48 hours.
However, like any financial service, revenue-based financing (RBF) also has potential downsides to consider:
❌ Lesser investment amounts.
Since RBF repayments are tied to business performance, financing companies may be cautious about providing larger investment amounts. Thiscan limit the funding available for businesses seeking a substantial capital infusion.
❌ Dependency on financial history.
When offering RBF, lenders typically assess a borrowing business's financial history. This evaluation can disqualify certain companies from accessing RBF or limit the financing they can secure based on their financial track record.
❌ Variable repayment periods.
With RBF, repayment periods are not fixed. As repayments are directly tied to revenue, you cannot precisely predict when you will fully repay the loan.
The variability of repayment periods requires careful financial planning and forecasting to manage cash flow effectively.
Let's explore the different types of revenue-based finance available:
Variable collection is the most common type of revenue-based loan.
Under this model, businesses receive an investment and repay it as a predetermined percentage of their monthly revenue (usually around 6-12%) until the loan and interest are fully repaid.
Unlike traditional loans, there is no fixed deadline for repayment. Instead, you repay a portion of your monthly revenue until you settle the debt.
In a flat fee agreement, the business receives a specific investment amount and commits to paying back a percentage of its revenue (typically around 1-3%) each month for a fixed period, often five years.
Unlike variable collection agreements, the repayment in flat fee agreements is determined by the revenue percentage, and the repayment period remains fixed.
In a Flat Free agreement, however, the amount you pay back to a lender can increase in connection to your revenue (though the overall time period of the agreement is fixed).
As a result, you may end up paying more than the original investment amount if your revenue scales significantly during the repayment period.
Flat fee agreements are commonly used by start-ups and new businesses, allowing them to repay a smaller interest rate relative to variable collection each month.
However, if the business experiences substantial growth over the repayment period, it may incur higher interest payments.
💡 These two types of revenue-based finance offer different structures for repayment, allowing you to choose the option that best aligns with your financial goals and growth projections.
The fees in revenue-based financing are straightforward – you commit to pledging a certain percentage of the revenue, weekly or monthly, in exchange for the investment.
In an RBF agreement, the repayment amount varies monthly, but the proportion of revenues allocated remains the same.
The specific terms of an RBF agreement depend on several factors.
These include:
Typically, larger investments lead to a higher percentage of the business's revenue being pledged in return.
Additionally, the risk associated with the loan influences the repayment required.
In recent years, revenue-based financing companies have emerged in the US, bringing this funding model to small and medium-sized enterprises (SMEs) for the first time.
The appeal of revenue-based finance lies in the benefits it offers to both investors and business owners seeking investment.
By opting for revenue-based financing, you can:
1. Fulfill large, costly orders.
When faced with the substantial costs of fulfilling large orders, you can access the necessary capital to meet customer demands without straining your cash flow.
2. Maintain cash flow.
Cash flow is vital for the smooth operation of any business. Revenue-based financing helps maintain a healthy cash flow by providing an injection of funds based on your revenue performance, ensuring you can cover expenses and seize growth opportunities.
3. Support business expansion.
As your business grows, you may need to cover additional costs, such as marketing, infrastructure, or talent acquisition.
While many businesses can reap the rewards, specific industries stand to gain the most:
Businesses engaged in online product sales are particularly well-suited for revenue-based finance.
This funding option allows them to swiftly invest in marketing initiatives or increase inventory to meet surging demand.
With easily accessible data from business accounting and marketing accounts, lenders can accurately forecast their performance, making revenue-based financing a favorable choice for ecommerce ventures.
Startups and businesses that experience peak performance during specific periods, such as ecommerce brands during Black Friday or holiday seasons, greatly benefit from the performance-based nature of revenue-based financing.
After receiving a loan, they can swiftly repay it using the revenue generated during the extra profitable period.
Revenue-based repayments rely on Monthly Recurring Revenue (MRR), making it an advantageous funding option for companies with predictable and consistent monthly revenue streams.
The combination of revenue predictability and relatively low overhead costs positions them favorably to meet monthly repayment obligations.
There are several alternatives to revenue-based financing to consider:
1. Debt Financing
2. Equity Financing
This method involves selling the company's ownership stakes (equity) to investors in exchange for funding. You can do this through venture capital firms, angel investors, or crowdfunding platforms.
3. Grants and Subsidies
Explore government grants, subsidies, or funding programs available for specific industries or initiatives which do not require repayment.
4. Bootstrapping
Self-fund the business using personal savings, revenue generated by the company, or reinvesting profits.
5. Crowdfunding
Raise funds from many individuals through crowdfunding platforms, typically in exchange for early access to products or other perks.
Each alternative financing option has its advantages and considerations, and the suitability will depend on the specific needs and circumstances of the business.
Revenue-based financing offers an excellent funding solution for those who want to preserve equity and avoid the lengthy process of raising capital while investing in revenue-generating initiatives.
By making repayments proportional to your monthly revenue, you can continue to expand your business without concerns about meeting fixed loan costs.
Whether or not you intend to explore other funding sources, revenue-based financing can significantly benefit any business owner aiming to retain equity and achieve rapid growth.
However, this funding solution is unsuitable for pre-revenue start-up businesses or those who experience unpredictable fluctuations since you must make monthly repayments.
Asset-based financing is a lending option in which financiers offer funds based on the value of an asset. In the context of ecommerce, this typically refers to the inventory or stock of the seller.
Ecommerce businesses can significantly benefit from this type of financing as it enables them to access cash and expand their working capital quickly.
Moreover, unlike traditional financing methods, asset-based financing imposes fewer requirements, making it accessible to a broader range of borrowers.
It allows you to allocate resources toward other expansion opportunities, maximizing your growth potential.
1. Objective Valuation Based on Asset
Using assets as collateral for financing offers businesses the advantage of obtaining funding based on the asset's value rather than solely relying on the company's creditworthiness.
Thus, it opens up financing opportunities even for businesses with limited credit history.
Myos uses an AI-based algorithm that evaluates the market value of your products, and based on the given score, you will get an estimated loan amount.
2. Improves Cash Flow Cycle
Asset-based financing accelerates a business's cash flow by securing the extra funds needed to acquire new products, invest in marketing, or cover other ongoing costs.
It particularly benefits companies experiencing poor cash flow, as it helps bridge the gap between expenses and revenue.
3. Capital for Business Expansion
Asset-based lending is an excellent short-term funding solution for businesses.
You can use the cash to pay employees and suppliers or invest in expansion and growth activities, providing the necessary capital to fuel business expansion.
The application process with Myos is quick, taking only a few minutes.
Once approved, you have full autonomy in deciding how to use the funds.
Moreover, unlike numerous other online lenders, Myos does not require a personal guarantee from its customers.
👍 No personal guarantee, only goods as collateral.
👍 Flexible repayment terms to 24 months.
👍 Multiple funding options are available, including purchase and stock funding.
👍 Loan amounts ranging from £10,000 to £2,500,000.
👍 A simple application process that consists of just three steps.
👍 Prompt response with immediate action taken within 24-72 hours.
Get a non-binding, free offer from Myos to secure the funding you need and propel the growth of your ecommerce business today.
11 Revenue-Based Financing Companies To Consider in 2023
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