Revenue-Based Financing: Grow Your Business Without Traditional Debt
Tue | February 2024
Starting your own business is thrilling, much like a roller coaster ride—full of highs and unexpected turns. Yet, the Bureau of Labor Statistics reveals a challenging truth: about 20% of small businesses close within their first two years. But don't worry; this guide is here to help you navigate one of the most critical aspects of your entrepreneurial journey—financing.
While bank loans might be the first funding source that comes to mind, a growing trend is catching the eye of smart entrepreneurs: Revenue-Based Financing, or RBF. Imagine it as having a supportive partner who invests in your success and celebrates your victories alongside you.
Are you curious if Revenue-Based Financing is the right fit for your venture? You're in the perfect spot. We'll dive into what RBF is, its advantages, and how to secure it for your business.
Let's go ahead and start this journey together!
What is Revenue-Based Financing?
Revenue-Based Financing (RBF) is an alternative funding option for businesses to access capital without giving up ownership. Instead of fixed monthly payments, you pay back a percentage of your monthly revenue. This means your payments can be adjusted based on your business performance, so you pay more when sales are good and less when they're slow.
Here's how revenue-based financing works: You get a lump sum of money upfront based on your future sales (revenue) and agree to pay back a percentage of your business's revenue each month. This continues until you've paid back the original amount plus an extra percentage, known as the "factor". The factor usually ranges from 1.2x to 1.5x the amount you are receiving.
Here's how a revenue-based financing deal might work if you received $25,000 from a funder:
Initial Investment: Imagine your business gets $25,000 to invest in a project you know will yield short-term or long-term gains.
Factor: This is set at 1.3 times the amount you received. It's like the total you agree to pay back.
Total Repayment: You would pay back $32,500 ($25,000 multiplied by 1.3).
Remember, your payment can be adjusted with your business's revenue. On a slower month, you may pay less (based on the percentage agreed upon). However, the total you need to pay back doesn't change – it stays at $32,500 from the start of your agreement until you've paid it all.
And while RBF doesn't technically have a set payoff date, most businesses will complete their repayments in about three to twelve months. Consider that each agreement is unique, negotiated between the company and the funder, and can involve different repayment structures.
Benefits of Revenue-Based Financing for Entrepreneurs
RBF can be a lifesaver for businesses that don't apply for the traditional financing methods. It guarantees flexible repayment terms and quick access to capital over the conventional ones that require too many documents, it takes longer time to be approved and adds more pressure over your business and personal assets.
Compared to conventional methods, RBF offers several benefits:
Keep Full Ownership: Traditional business loans can impact equity or ownership while RBF's contract is over when you finish to pay back. Your business will still be yours no matter what.
Payments That Adapt to Your Sales: Your financing payment increases if sales increase. If sales are down, you pay less. Traditional business loans don't do this — you pay the same monthly amount, no matter how well your business is doing.
Credit Score Isn't a Deal-Breaker: RBF can still be an option, unlike other business loans that might say 'no' if your credit isn't great.
Less Paperwork: RBF doesn't need as much paperwork as traditional loans. Usually, you'll need to show who you are, where your business banks, and a few months' bank statements.
Fast Cash: Getting a traditional loan can be slow (think a month or more). RBF can get you funded in as quick as 72 hours.
No Risk to Personal Property: RBF won't involve your personal assets into the contract. The traditional methods can and often require putting your house or your car at risk as a collateral.
Spend as You See Fit: The money you get from RBF is yours to use however you decide on your business growth. Other types of funding might come with strings attached or someone else telling you what to do with the cash.
Easier to Find: You don't have to leave your home to access capital for your business with the RBF. Companies like One Park Financial are online to help small businesses.
As you can see, Revenue-Based Financing offers some unique advantages for small businesses like yours. It lets you keep control, enjoy flexible payments, and get funding faster while protecting your personal assets and allowing you to use the funds as you see fit.
How RBF Fuels Small Business Growth
Do you ever worry about losing a piece of your business if you apply for a business loan? Here's some good news: with Revenue-Based Financing, that shouldn't be a concern. As we've mentioned, you get to own your business altogether. All you do is share a small part of your business's future sales until you've repaid what you borrowed, plus the extra capital costs.
Also, not having collateral to borrow capital is not an issue; RBF is all about your business potential, not what you own right now. Whether you're starting or dreaming big for your small business, RBF could help you soar to new heights.
Below are some examples of how you can take advantage of this type of financing if you have a small business:
E-commerce and Retail: An online retail store expects to sell more during the holidays. They use RBF to buy extra inventory. The store will pay back the funding and a fixed fee from the extra sales in the months ahead.
Software as a Service (SaaS): A SaaS company wants money to invest in marketing and getting more customers to increase its monthly revenue. The company receives RBF and agrees to give the financier a share of its monthly subscription revenues until the financing is paid back.
Restaurants and Cafés: A restaurant can use RBF to expand or buy new kitchen equipment. It repays the amount from a percentage of its daily sales. This is helpful for businesses with sales that change with the seasons.
Health and Wellness Businesses: A health and wellness center plans to release new wellness products. It chooses revenue-based financing (RBF) for product development and marketing. The center will repay the funding from a portion of its product revenue.
As the examples above show, revenue-based financing is a flexible option for small businesses. It helps them grow without fixed repayment schedules or losing equity. This type of financing works well for companies with high revenue potential but fluctuating cash flows.
Is Revenue-Based Financing Right for You?
Your business is growing. You might be thinking about significant steps like hiring more people, releasing new products, getting better equipment, renovating your office, or increasing your marketing. You need to pick the right way to finance these decisions.
Here's how to determine if revenue-based financing (RBF) is a match for your business needs:
Reliable Revenue Stream: Your business must have a steady flow of income; this ensures you can meet the monthly payments required by an RBF agreement without strain.
Steady Customer Base: Businesses with a loyal customer base and a proven track record are strong candidates for RBF.
Healthy Bank Statements: With a reliable revenue stream and steady customer base, it is essential that a business owners makes sure that their bank statements showcase that in their deposits. It's also very important to show RBF funders that there is a steady stream of deposits and little to no negative days in the bank statements.
Now that you better understand how income-based financing works, are you considering applying for this type of financing? At One Park Financial, we can help you, as we have more than 20 years of working with small businesses.
If you're ready to grow and want to learn your options today, let's talk about how One Park Financial can help you succeed.
How to Apply for Revenue-Based Financing with One Park Financial
If your business is small or medium-sized, with a minimum of 3 months in operation, and has a revenue of $7,500 or more monthly, follow these quick steps:
Talk with one of our experts.
Receive an offer in less than 48 hours.
Get funded that very same day!
It is straightforward. And remember, having poor credit won't be a limitation. For further information about OPF application process and minimum qualifications, see: How it works | Requirements and funding process
Disclaimer: The content of this post has been prepared for informational purposes only. It is not intended to provide and should not be relied on for tax, legal, or accounting advice. Consult with your tax, legal, and accounting advisor before engaging in any transaction.