Revenue-Based Financing: How a Revenue-Based Loan Works by Tricia Tetreault

TL;DR - Definition, explanation, pros, and cons of revenue-based financing

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Tags - revenue-based financing, pros and cons of revenue-based financing

Questions answered:

  • What is revenue-based financing?
  • Who is revenue-based financing for?
  • What are some companies that offer revenue-based financing?
  • What do companies need to receive revenue-based financing?
  • What are the pros and cons of revenue-based financing?

Summary:

  • Revenue-based financing is a type of small business loan offered by niche lenders in which payment amounts are based on a percentage of monthly business revenue.
  • Monthly payments fluctuate with the company’s revenue highs and lows and are made until the loan is fully paid back.
  • General terms and requirements:
    • Minimum monthly revenue requirements: $15,000 - $100,000
    • Loan amounts: $50,000 - $3,000,000
    • Gross margin required: at least 50%
    • Payment terms: a fixed monthly percentage of gross (usually 3% - 10%)
    • Total cost of capital (repayment cap): 1.35x - 3x the amount borrowed
    • Interest rate: 18% - 30%
    • Funding speed: 3 - 4 weeks
  • Revenue-based funds are generally expected to be used for growth capital to scale the company by expanding efforts (e.g. product development, sales and marketing, hiring staff).
  • Lenders expect funds to have a plan to increase their business revenues.
  • Revenue-based financing works well for companies with high gross margins, subscription-based revenue models, or stable revenue streams but without the collateral needed for traditional loans.
  • Examples of businesses that might be interested in revenue-based financing:
    • Businesses too small for VC
    • Founders who want to retain full control
    • Businesses unable to obtain other financing
  • Examples of companies offering revenue based financing: Lighter Capital and GSD Capital
  • Typical additional documents needed for application: bank statements and business plan/investor deck
  • Pros of revenue based financing:
    • Easier qualifications than traditional financing
    • Repayment flexes with revenues
    • Faster funding than traditional loans or VC
    • Retained equity
  • Cons of revenue based financing:
    • Higher costs than traditional funding
    • Regular payments required
    • Shorter repayment period than traditional funding

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