When it comes to running startups and SMBs, finding the right type of financing is one of the most important factors that determine business’s success. Traditional loans? More often than not they are associated with a set payment schedule that requires you to pay a specific amount of money irrespective of whether your business is doing badly. Venture capital? There might be a problem of losing control while the business would be expected to grow in equity rapidly. Sweeten the deal with revenue-based financing (RBF) – a more diverse, flexible type of financing where your repayment period depends on your business’s revenue.
Let’s break it down. This means that with RBF, business are not burdened with monthly fixed charges. However, they pay back a fixed percentage of monthly sales , this makes your refund vary depending on your sales. If the generated amount of money of the month is small, your repayment will be small as well. Your repayment also goes high when the sales go high and it shows the fluctuation that your company feels. It is one that suits your growing business than one that would work against it.
But it’s not exactly a task of obtaining cash in hand is all that is required. The catch? RBF loans are normally repaid at a higher multiplier of the amount of the original loan grant. No, you don’t just repay the amount you borrowed, but you repay with interest. The total that is repaid is frequently much greater and it is in this way that the lender can be sure to get his money back with profit. This repayment is always limited to a fixed number of times the principal, so you will never hopelessly get into uncertainty of how much you would need to pay back.
This model has been accepted for its benefit in the following areas and for attracting businesses mostly delivering constant and regular income but who may lack collateral or who may not wish to surrender equity. It is especially appealing to those businesses with established sales that are still somehow outside the classic range of banking credit or venture financing. RBF was ideal because it did not take away the need to sacrifice control or ownership of one’s business. The lender’s risk is your revenue, and the lender can only profit if you are doing well in your financial endeavors.
However, as with everything in terms of financing, RBF has its own problems on the table. The cost of capital is higher than most conventional lending, and to some firms, it may be too dear an investment. It is a pretty straightforward product for business owners who require access to funds now and are willing to rely on their revenue streams. Repayment can be easier if the company experiences some turbulence, while it will cost more, were the opposite is true, and this is something that has to be considered well.
Therefore, revenue-based financing is a bit more than simply another tool to attract financing. It is an approach that is as fluid as the businesses confronting it every day of the week. It’s all about finding a balance: A dynamic strategic middle ground that can be defined on the basis of growth, flexibility and cost. Any entrepreneur who wants funds to grow his or her business but is not ready to give his or her company future then RBF is the answer to the kind of growth your business needs.
