Revenue Based Financing: What is it and how can it Help Grow Your Business?
If you’re an entrepreneur seeking affordable funding options for your business without giving up equity or being burdened by debt, Revenue-Based Financing (RBF) might be just what you’re looking for! RBF has been steadily rising in popularity among growth-stage companies, and for good reason; the flexibility and unique blend of equity and debt financing is changing the game as it keeps you in control every step of the way.
But that’s not all. A whole world of revenue-based avenues, such as Merchant Cash Advances and Factoring are entering the scene too!
In this article, we will dive into the world of RBF, its alternatives, and provide you with valuable resources to help you make an informed decision about financing your business.
What is Revenue Based Financing?
Revenue Based Financing is a new type of funding that combines the convenience of a business loan with the peace of mind of flexible repayment options.
Instead of a set monthly repayment, RBF allows your company to trade a percentage of sales for start-up capital. This allows you and the investor, as it provides the funds you need without tying up valuable equity or incurring debt. Your investor can rest easy knowing that they will receive regular payments (though the amounts may vary) under a legally binding contract.
HOW IT WORKS:
1. Find an Investor
Venture capital firms, dedicated RBF investors, or angel investors are a good place to start.
2. Pitch Your Business
Present your business plan, financials and growth projections to the investor. Show them your intended use of the funds and your company’s potential for generating consistent revenue.
3. Negotiate Terms
If the investor is interested, this is where you will negotiate the investment amount, percentage of revenue shared, repayment cap, and anything else that is pertinent to the deal.
4. Sign on the Dotted Line
Once the terms are agreed upon, both you and the investor sign a legally binding document that outlines the specifics of the deal.
5. Put the Funds to Use
Receive your funds (usually in a lump sum), and put them to work in marketing, product development, hiring, or other areas that will propel your company’s growth forward.
6. Monthly Payments
As your business starts generating revenue, repay your investor based on the agreed-upon monthly percentage.
7. The Repayment Cap
Once you have hit the predetermined repayment cap, your obligation to the investor is fulfilled, and you retain full control of your business.
RBF Alternative: Merchant Cash Advances
If your business is retail based or receives a high volume of revenue from credit card transactions (such as a restaurant), Merchant Cash Advances may be a more suitable financing option. With MCA, you exchange a percentage of future credit card sales for the lump sum investment.
HOW IT WORKS:
1. Apply for MCA
Once you find a reputable Merchant Cash Advance provider, apply for funding using the above-mentioned information for your business, as well as your credit card transaction history.
2. Receive the Funds
Again, usually a lump sum.
3. Repay Via Sales
MCA offers a big advantage in that you have quick access to the funds, and the flexibility of repayments being tied to sales, which eliminates the need for collateral.
However, MCA’s can be more expensive than a traditional loan, and the deduction from your daily sales may impact your cash flow for a time.
Learn more about Merchant Cash Advances here.
RBT Alternative: Factoring
Factoring is also known as accounts receivable financing or invoice financing. It may work best for you if your business is facing cash flow issues due to slow-paying clients. With factoring, you sell your unpaid invoices to a factoring company at a discount, and they take care of collecting the funds.
HOW IT WORKS:
1. Find a Reputable Factoring Company
Preferably one that specializes in your industry.
2. Sell Your Unpaid Invoices to the Factoring Company at a Discounted Rate
Usually 70-90% of the invoice amount.
3. Get Paid Upfront
The Factoring company will subtract their fees and pay you the agreed upon amount right away.
4. Invoice Collection
Now it’s out of your hands, and the factoring company takes care of collecting the overdue amount from your clients!
5. Receive the Remaining Balance
Once the client pays, the Factoring Company will send you the remaining balance, minus their fees.
Factoring eliminates the need for you to waste time chasing after clients to pay their invoices, and gives you quick access to the funds, relieving your financial stress.
However, like merchant cash advances, factoring can be more expensive than a traditional loan.
Choosing the Right Financing Option
After reading this article and looking into the different financing options for your business, you hopefully have an idea of which option is best for your business. Ultimately though, the biggest factors to consider are:
- Your Business Industry
- Your Revenue Model
- Company Growth Stage
- Repayment Flexibility
Once you determine those, you can make the choice that works best to propel your business forward!
Revenue Based Financing is getting more creative and attainable as the structure of our economy evolves. It really is becoming the financing option of the future.