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
- 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?
- 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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