Guide to Revenue-Based Business Loans

When it comes to securing financing, many businesses turn to traditional loans that require personal guarantees or collateral. However, revenue-based business loans offer an alternative that aligns repayment with a company's financial performance. Instead of fixed monthly payments, these loans are repaid through a percentage of the business's revenue, making them a flexible option for companies with fluctuating cash flow.

Here’s what you need to know about how small business revenue-based business loans work, their advantages and drawbacks, and how to determine if this business financing is right for your business.

Key Points:

• Repayment Structure: Payments are based on a fixed percentage of the business's revenue, offering flexibility during periods of fluctuating income.
• Qualification Criteria: Approval is largely based on a company’s revenue performance, rather than credit scores or collateral.
• Loan Costs: While repayment adjusts with revenue, the overall cost of the loan may be higher than a traditional bank loan due to fees or percentage-based terms.

How Do Revenue-Based Business Loans Work?

Revenue-based business loans function differently from other small business loans by tying repayment to the borrower's revenue rather than requiring fixed monthly payments like a term loan. Lenders provide businesses with a lump sum of capital in exchange for a predetermined percentage of the company's future revenues.

Instead of a set repayment schedule, businesses make payments based on their daily or monthly revenue, meaning payments rise when the business performs well and decrease during slower periods. This type of financing offers flexibility, particularly for businesses with seasonal or fluctuating cash flows, but the total repayment amount often exceeds other financing options due to higher fees or interest rates.

What Can Revenue-Based Business Loans Be Used For?

Common uses include funding marketing campaigns, purchasing inventory, expanding operations, or launching new products. These loans are particularly useful for businesses with variable income, like e-commerce companies or seasonal businesses, because they align repayment with revenue flow.

Revenue-based financing, sometimes called a merchant cash advance, can help cover short-term expenses or bridge cash flow gaps without the pressure of fixed payments. Since approval is often based on the company’s sales performance rather than credit history or collateral, it’s a flexible option for businesses looking to grow or stabilize their operations.

The Step by Step Process of Getting a Revenue-Based Business Loans

The application process for a revenue-based business loan isn’t much different than a traditional term loan.

The business owner submits an application providing key financial details such as recent balance sheets and business bank statements. The lender then reviews the business’s performance for eligibility, focusing on its revenue trends rather than traditional metrics like credit scores or collateral.

Once approved, the lender offers a loan amount along with the percentage of annual revenue that will be used for repayment. If the terms are accepted, the funds are disbursed directly to the business owner.

The repayment terms are typically set to begin repayment immediately with the lender collecting a set percentage of the business’s daily or monthly revenue until the full loan amount, plus interest. This flexible approach allows repayment to adjust with the business's revenue, making it ideal for companies with variable income.

Things To Keep in Mind When Applying for Revenue-Based Business Loans

When applying for a revenue-based business loan, it's essential to consider a few key factors. First, while repayment is flexible, the overall cost of the loan can be higher than other funding options due to the percentage-based repayment structure and associated fees.

Make sure your business has recurring revenue, as inconsistent sales can prolong the repayment period. It's also important to carefully evaluate the repayment percentage the lender is asking for, as a high percentage could strain your cash flow. Bad credit could also lead to less favorable terms for small business owners.

Additionally, review the revenue-based financing agreement to ensure the loan aligns with your financial goals. Lastly, research the lender’s reputation to avoid hidden fees or unfavorable terms.

Bottom Line

Small business owners should consider all loan options when looking for working capital. It’s a flexible financing option that could prove more useful than a business credit card or term loan. However, it could weigh heavily on your balance sheet and business plan in the future. Be sure to consider all business funding options during your search to find the best one for you.

FAQ Questions on Revenue-Based Business Loans

How does revenue-based financing work?

Revenue-based financing provides startups and small businesses with upfront capital in exchange for a fixed percentage of their future revenues, allowing repayment to vary based on the company's income. Unlike traditional loans, there are no fixed monthly payments.

What are the typical terms for a revenue-based business loan?

Typical terms for a revenue funding loan include a repayment percentage ranging from 5% to 20% of the business's revenue streams, with flexible repayment periods varying based on performance.

What are the types of businesses that use revenue-based financing?

Revenue-based financing (RBF) is commonly used by startups and growing businesses where a traditional business loan may not work. It’s also favored by seasonal businesses or those with fluctuating income, as the repayment structure adjusts to their cash flow.

Does the SBA offer revenue-based financing?

No, it does not. Online lenders typically offer this type of financing.