When you’re a small business owner, it can be tough to get a loan from a bank. They often require collateral, and they tend to be hesitant to lend money to businesses that don’t have a long track record. This is where revenue-based financing can come in handy.
What is Revenue-Based Financing?
According to Lantern by SoFi, “revenue-based financing is a type of loan based on the future revenue of your business. The lender will give you a certain amount of money, which you will repay based on a percentage of your company’s revenue.” This can be a helpful option for small businesses that are just starting or for businesses struggling in recent months.
How Do You Qualify?
As with any other type of loan, you will need to qualify for revenue-based financing. Typically, lenders will look at the amount of money you bring in each month and compare it to your company’s overhead costs. They want to see that there is enough left over after paying for all expenses so that they can make a profit from lending out their funds.
If your business does not generate enough cash flow for them to cover their costs plus interest payments on what has been borrowed, then this may be an option worth exploring further, based upon other types of business loans being considered during early-stage startup rounds or later on in a company’s path to growth.
Benefits of Revenue-Based Financing
If you’re looking into types of funding for your business, one option you might want to consider is revenue-based financing. This type has some advantages over other types of business loans because it doesn’t require collateral or an established history with the lender. Approval times are faster too.
Other benefits of revenue-based financing include:
- Easy access to funding for small businesses that don’t have collateral or credit history yet.
- Low risk since repayments are made directly from your sales revenue, the lender doesn’t need collateral either, so they’re not at a significant loss if things don’t work out.
Fast approval times since the lender takes less time evaluating your application than traditional types of lending institutions (e.g., banks).
When Should I Use Revenue-Based Financing?
Revenue-based financing can be an excellent option for small businesses that don’t have access to traditional types of funding. And if you’re looking for an alternative way to fund your company’s growth, revenue-based financing might be worth exploring.
Disadvantages of Revenue Based Financing
Revenue-based financing has some disadvantages as well:
- Higher interest rates than traditional types like loans from banks, credit cards, or lines of credit because they don’t require collateral or established business history.
- Repayment schedules may not fit with your monthly cash flow, so you might have to end up restructuring your debt, which could lead to more fees.
If your business is not doing well and sales are low, you might struggle to make the monthly payments on time or at all. In this case, the lender has the right to seize company assets until you pay the loan in full.
Overall, there are various types of business loans you need to consider when looking into types of funding. One option might be revenue-based financing because it doesn’t require collateral or an established history with the lender. Evaluating applications also takes less time than traditional types, making approval times faster.
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