Why Revenue-Based Financing is the Future of Small Business Funding 

Disclaimer:
Information
in
the
revenue-based
financing
articles
is
provided
for
general
information
only,
does
not
constitute
financial
advice,
and
does
not
necessarily
describe
Biz2Credit
commercial
financing
products.
In
fact,
information
in
the
revenue-based
financing
articles
often
covers
financial
products
that
Biz2Credit
does
not
currently
offer.

We
all
know
that
small
businesses
form
the
crux
of
the
American
economy.
As
foot
soldiers
of
the
economy,
they
carve
out
a
path
to
economic
resilience
and
prosperity,
ensuring
that
America’s
financial
future
always
remains
solid
and
stable.
Yet,
their
path
to
success
is
riddled
with
challenges
–
right
from
funding
to
planning
to
hiring.
They
struggle
to
get
the
financing
they
need
for
their
growth,
as
traditional
banks
are
not
always
flexible
enough
to
come
to
their
aid.
Hence,
a
lot
of
small
businesses
fail
to
grow
and
thrive,
unlike
their
big-name
competitors.

But
not
everything
is
lost!
In
the
last
few
years,
alternative
funding
options
have
been
tailored
for
small
businesses.
One
such
option
is


revenue-based
financing,
which
has
become
popular
with
entrepreneurs
and
startups.

It
allows
borrowers
to
raise
money
by
repaying
investors
with
a
percentage
of
their
future
revenue
rather
than
fixed
monthly
payments
or
equity
stakes.
It
also
ensures
that
businesses
do
not
run
out
of
working
capital
when
they
need
it
the
most.

Sounds
interesting,
doesn’t
it?
No
wonder
there
has
been
an
increase
in
the
application
of

revenue-based
financing
in
recent
years.
But
before
you
get
excited,
let’s
understand
exactly
what
revenue-based
funding
is,
how
it
works,
what
it
can
be
used
for,
and
finally,
whether
it
is
the
right
kind
of
financing
for
you.

3
Key
Takeaways

1. Revenue-based
   funding
   provides
   flexible
   financing
   options
   to
   small
   businesses
   and
   startups
   without
   sacrificing
   equity.
   The
   repayment
   is
   linked
   to
   a
   company’s
   monthly
   revenue.
2. With
   faster
   and
   less
   stringent
   application
   and
   approval
   processes,
   they
   provide
   access
   to
   speedier
   cash
   without
   requiring
   collateral.
3. This
   financing
   model
   suits
   businesses
   with
   variable
   or
   fluctuating
   revenue
   streams
   such
   as
   e-commerce,
   SaaS
   companies,
   media,
   etc.

How
Does
Revenue-Based
Financing
Work

A
truly
revolutionizing
funding
option,

revenue-based
financing
(RBF)
offers
small
businesses
and
startups
an
attractive
alternative
to
traditional
financing
methods.
RBF’s
adaptable
repayment
structure
suits
businesses
with
fluctuating
revenues
by
allowing
companies
to
raise
money
instead
of
a
percentage
of
their
future
income
rather
than
fixed
monthly
payments
or
equity
stakes.
Since
this
financing
type
is
often
processed
faster
than
traditional
bank
loans,
working
capital
can
be
made
available
more
quickly,
making
it
perfect
for
businesses
with
urgent
capital
needs.
Another
feature
of
RBF
is
that
it
does
not
require
collateral
or
personal
guarantees,
making
it
easier
for
businesses
without
significant
assets
to
seek
necessary
funds.

Mechanics
of
Revenue-Based
Financing 

With
this
type
of
financing
(also
known
as
royalty-based
funding),
after
deciding
on
the
initial
investment
amount,
the
lender
charges
a
fixed
fee
on
the
principal
amount,
calculated
as
a
percentage
of
future
revenue,
to
be
repaid
by
the
borrower.
This
percentage
is
usually
between
3%-8%,
depending
on
the
agreement.

RBF
stands
apart
from
traditional
business
loans
because
it
adapts
to
the
company’s
revenue
cycle
–
increasing
during
peak
periods
and
decreasing
during
slower
ones.
In
short,
the
payments
are
directly
proportional
to
the
company’s
monthly
revenue
growth.

This
funding
is
also
different
from
other
alternative
financing
options.
Unlike


Merchant
Cash
Advance
(MCA)
loans,
which
are
paid
back
from
credit/debit
card
sales,
RBF
considers
total
sales
and
offers
a
more
flexible
repayment
term.
It
is
also
different
from
a
line
of
credit
loan,
which
allows
borrowers
funding
up
to
a
certain
limit
with
repayment
based
on
usage.
With
RBF,
the
focus
remains
on
the
revenue
rather
than
credit
scores,
making
it
easier
for
the
borrower
to
qualify
for
the
loan.
But
keep
in
mind
that

interest
rates
are
typically
higher
with
revenue-based
loans.
So,
while
selecting
a
funding
option,
businesses
must
consider
the
trade-offs
between
flexibility,
accessibility,
and
overall
expense.

Understanding
Revenue-Based
Financing
(RBF)

Before
we
talk
about
the
best
use
of

revenue-based
financing,
it
is
important
to
understand
what
underwriters
look
for
in
candidates
and
businesses
when
assessing
RBF.

Who
Should
Apply
for
Revenue-Based
Financing?

As
mentioned
before,
revenue-based
funding
is
suitable
for
businesses
with
high-profit
margins,
certain
startups,
and
businesses
experiencing
cash
flow
problems
yet
maintaining
a
steady
recurring
revenue.
Borrowers
who
are
unable
to
apply
for
traditional
business
loans
due
to
poor
credit
history
or
lack
of
significant
assets
can
also
qualify
for
this
type
of
financing.
As
RBF
depends
on
immediate
revenue,
any
company
just
starting
out
or
in
the
pre-revenue
stage
of
the
business
should
skip
this
funding
option.

What
Can
Revenue-Based
Financing
Be
Used
for?

The
capital
from
RBF
can
be
used
to
drive
growth
and
innovation
in
small
businesses
and
startups.
From
scaling
operations
to
purchasing
inventory
to
hiring
additional
staff,
RBF
can
act
as
a
catalyst
to
drive
business
growth
to
the
next
level.
Here
are
some
more
ways
to
use
funding
from
RBF:

• 
  Scaling
  Operations
  –
  By
  providing
  the
  capital
  to
  expand
  the
  operations
  quickly,
  RBF
  helps
  businesses
  grab
  market
  opportunities
  and
  increase
  their
  customer
  base.
• 
  Fostering
  Growth-Oriented
  Mindset
  –
  As
  RBF
  repayment
  is
  linked
  to
  revenue,
  it
  encourages
  small
  businesses
  and
  startups
  to
  focus
  on
  revenue-generating
  activities,
  resulting
  in
  a
  growth-oriented
  mindset.
• 
  Effective
  
  Cash
  Flow
  Management–
  The
  flexibility
  offered
  by
  this
  type
  of
  funding
  helps
  businesses
  handle
  their
  cash
  flow
  more
  efficiently,
  ensuring
  they
  do
  not
  experience
  financial
  strain
  during
  slow
  periods.

Industries
That
Benefit
from
Revenue-Based
Financing

This
alternative
form
of
funding
benefits
many
businesses,
but
a
few
still
flourish.

• 
  Technology
  and
  SaaS:

  With
  fluctuating
  revenues
  and
  a
  frequent
  need
  for
  capital
  for
  rapid
  scaling,
  technology
  and
  SaaS
  companies
  require
  the
  flexible
  funding
  that
  RBF
  offers.
  This
  form
  of
  financing
  allows
  the
  companies
  to
  invest
  in
  growth
  without
  giving
  up
  equity
  or
  facing
  fixed
  repayment
  schedules.

• 
  E-commerce:

  This
  loan
  works
  well
  for
  online
  retailers
  as
  the
  capital
  can
  be
  used
  to
  manage
  their
  revenue
  fluctuations
  during
  the
  off-season
  and
  investment
  in
  growth
  opportunities
  during
  the
  peak
  ones.
  They
  can
  stock
  up
  on
  inventory
  and
  save
  up
  on
  ad
  spend
  for
  the
  peak
  season,
  then
  quickly
  pay
  off
  their
  loan
  with
  the
  revenue
  they
  make.

• 
  Subscription-Based
  Services:

  As
  these
  companies
  receive
  monthly
  or
  periodic
  payments,
  they
  know
  exactly
  how
  much
  revenue
  they
  will
  make
  each
  month.
  This
  pattern
  and
  low
  overheads
  make
  it
  easier
  for
  them
  to
  make
  monthly
  payments.

• 
  Healthcare
  and
  Biotechnology:

  A
  lot
  of
  companies
  in
  these
  sectors
  need
  quite
  a
  heavy
  upfront
  investment
  for
  their
  R&D.
  Here,
  RBF
  comes
  into
  play
  by
  providing
  them
  with
  the
  required
  amount
  without
  sacrificing
  equity
  and
  linking
  repayments
  with
  future
  revenue
  from
  product
  sales
  or
  partnerships.

Step-by-Step
Revenue-Based
Financing
Process

RBF
works
in
four
key
steps
and
borrowers
must
pay
attention
while
completing
all
these
stages
to
ensure
they
get
their
funding
without
any
hitch:

1. 
   Eligibility:
   A
   proven
   track
   record
   of
   steady
   revenue,
   with
   at
   least
   six
   months
   of
   operational
   history,
   is
   required
   to
   be
   eligible
   for
   
   revenue-based
   financing.
   Most
   lenders
   online
   financing
   providers
   like
   Biz2Credit
   look
   for
   annual
   income
   greater
   than
   $250,000,
   but
   some
   settle
   for
   revenue
   around
   $100,000
   annually.
2. 
   Assessment:
   Financial
   and
   bank
   statements,
   as
   well
   as
   revenue
   reports,
   allow
   lenders
   to
   assess
   the
   creditworthiness
   of
   the
   borrower
   and
   decide
   whether
   the
   applicant
   is
   eligible
   or
   not.
   They
   may
   analyze
   future
   revenue
   trends
   to
   determine
   whether
   the
   business
   can
   meet
   the
   repayment
   obligations.
3. 
   Quote
   and
   Agreement:
   Post
   review,
   an
   initial
   investment
   amount
   or
   quote
   will
   be
   shared
   by
   the
   lender
   –
   outlining
   the
   capital
   amount,
   repayment
   percentage,
   duration,
   and
   total
   repayment
   cap.
   Once
   both
   parties
   sign
   the
   agreement
   –
   the
   loan
   amount
   will
   get
   dispatched
   quickly
   –
   often
   within
   a
   week.

While
negotiating
the
agreement
for
this
type
of

business
loan,
keep
in
mind
the
following
components
that
are
very
important
to
understand:

• 
  Revenue
  Share
  Percentage

  This
  means
  that
  a
  percentage
  of
  the
  business’s
  monthly
  revenue
  will
  be
  set
  aside
  for
  the
  repayments.
  The
  rate
  of
  monthly
  income
  that
  will
  be
  allocated
  to
  repayments.
  This
  is
  typically
  between
  3%
  and
  8%.

• 
  Repayment
  Cap

  This
  implies
  the
  total
  amount
  to
  be
  repaid
  at
  the
  end
  of
  the
  term.
  It
  is
  usually
  a
  multiple
  of
  the
  initial
  funding
  amount.

• 
  Term
  Length

  It
  is
  the
  expected
  duration
  of
  the
  repayment
  period.
  It
  can
  differ
  based
  on
  revenue
  performance.

Things
to
Keep
in
Mind
When
Applying
for
Revenue-Based
Financing

Choosing
funding
is
not
an
easy
task.
As
it
may
affect
a
business’s
financial
health,
business
owners
must
carefully
consider
every
aspect
related
to
financing
needs.
Here
are
a
few
things
to
keep
in
mind
while
applying
for
RBF:

1. 
   Select
   the
   Right
   Lender

   Not
   all
   RBF
   lenders
   are
   the
   same.
   It
   is
   necessary
   to
   conduct
   in-depth
   research
   and
   choose
   a
   reputable
   lender
   with
   transparent
   terms
   and
   supportive
   customer
   service.
   You
   can
   consider
   looking
   at
   platforms
   like
   Biz2Credit,
   which
   specializes
   in
   RBF.

2. 
   Understand
   Your
   Revenue
   Patterns

   Most
   lenders
   advise
   borrowers
   to
   understand
   their
   business’s
   revenue
   patterns
   thoroughly.
   It
   is
   of
   utmost
   importance
   as
   it
   will
   determine
   whether
   they
   can
   manage
   the
   flexible
   repayment
   amounts.
   For
   example,
   seasonal
   businesses
   must
   be
   ready
   to
   pay
   high
   repayment
   amounts
   during
   peak
   sale
   periods.

3. 
   Assess
   Creditworthiness

   A
   lot
   of
   lenders
   look
   for
   certain
   annual
   revenue
   generation,
   credit
   scores,
   type
   of
   business,
   and
   usage
   of
   funds
   while
   trying
   to
   assess
   the
   creditworthiness
   of
   the
   borrower.
   It
   may
   vary
   depending
   on
   lenders,
   but
   it
   is
   better
   to
   maintain
   a
   score
   of
   650+
   to
   make
   this
   a
   seamless
   process.
   Any
   business
   that
   has
   not
   generated
   revenue
   yet
   or
   will
   not
   be
   generating
   income
   soon
   should
   steer
   clear
   of
   RBF.

4. 
   Prepare
   Documentation

   It
   is
   important
   to
   ensure
   that
   proper
   documentation
   is
   in
   place
   while
   applying
   for
   funding.
   It
   includes
   financial
   statements,
   bank
   and
   legal
   statements,
   tax
   returns,
   and
   revenue
   reports.
   Having
   all
   this
   information
   in
   one
   place
   can
   expedite
   the
   approval
   process.

Conclusion

RBF
works
best
for
those
businesses
who
are
in
the
market
for
a
flexible
and
non-dilutive
funding
option.
Since
the
repayment
is
linked
to
monthly
revenue,
the
company’s
cash
flow
will
not
be
under
pressure.
However,
while
these
aspects
make
RBF
very
useful
financially,
the
drawbacks
are
also
hard
to
ignore.
Non-dilution
and
flexibility
come
with
a
higher
rate
of
interest
that
might
make
repayment
difficult
for
some
small
businesses
in
the
long
run.
It
might
put
a
strain
on
the
company’s
financial
future.
That’s
why
its
borrowers
must
understand
all
the
aspects
of

revenue-based
financing
clearly
before
making
any
decision.

FAQ
Questions

What
is
revenue-based


financing
for
small
businesses?

RBF
is
an
intelligent
alternative
funding
option
for
small
businesses
and
startups,
where
upfront
funds
are
provided
for
a
percentage
of
the
business’s
monthly
revenue
instead
of
a
fixed
interest
or
equity.
It
helps
small
businesses,
especially
those
with
variable
monthly
income,
to
maintain
a
steady
cash
flow
to
meet
their
business
needs.

How
does
revenue-based
financing
work?

This
type
of
funding
allows
companies
to
raise
capital
in
exchange
for
a
percentage
of
their
monthly
revenue.
It
will
help
those
companies
with
fluctuating
monthly
revenue
as
they
can
avoid
paying
a
fixed
amount
of
interest.
Instead,
as
their
repayment
is
linked
with
their
monthly
income,
they
will
have
to
pay
a
higher
repayment
amount
during
peak
seasons
and
lower
during
off-seasons.

Who
is
eligible
for
revenue-based
financing?

Any
small
business
with
steady
annual
revenue,
even
if
their
monthly
income
fluctuates,
can
apply
for
RBF.
Moreover,
a
credit
score
must
be
above
650,
though
some
lenders
are
willing
to
accept
a
marginally
lower
score.
They
need
to
have
an
annual
income
of
$250,000
and
should
have
been
in
business
for
at
least
six
months.

What
are
the
benefits
of
revenue-based
financing?

There
are
many
advantages
of
revenue-based
funding.
It
includes
flexible
repayment
terms,
non-equity
funding
by
avoiding
equity
dilution,
and
enhancing
business
performance
since
the
repayment
is
tied
to
the
revenue.

Where
can
a
small
business
get
revenue-based
financing?

Several
platforms
offer
revenue-based
funding
options,
but
it
is
always
advised
to
go
with
a
reputable
lender
with
transparent
terms
and
notable
customer
service.
Because
any
funding
has
long-term
implications,
starting
with
someone
trustworthy
like
Biz2Credit
is
best.

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