Imagine this scenario:
You own a small business, but it’s growing fast.
Every month you’re bringing in new customers.
You were even profiled in your local newspaper as a company to watch.
However, you’ve got one major problem – not enough cash to keep up with the needs of your rapidly-expanding empire.
However, for a business experiencing rapid growth like yours, there is another choice you should consider – revenue-based financing.
What is Revenue-Based Financing?
Also known as royalty-based financing, revenue-based financing (RBF) is a type of business loan.
The typical RBF loan ranges between $50,000 and $1 million.
Lenders charge roughly one to three times the amount borrowed, which is repaid in monthly installments.
However, unlike a traditional bank loan where you need to make a set payment each month, loan repayments are based on a percentage of your monthly revenue.
This means the percentage you pay each month varies but can be as high as eight percent.
One reason business owners like these types of loans are because during slow months they’ll pay less – only making heftier repayments on the months where they rake in the most cash.
Instead of a fixed number of months to repay the loan, it is paid off based on the success of your company.
Meaning, the faster your business grows its revenue, the faster the loan gets paid off.
RBF lenders receive better returns the faster the borrower is able to repay the loan.
This is one reason RBF lenders are more interested in a business’s potential for rapid growth rather than current revenues when they evaluate prospective borrowers.
Other factors they consider include demonstrating how you’ll use the money, and how you plan to tap into the lender as a mentor.
What Types of Businesses Qualify for Royalty-Based Financing?
Royalty-based financing is typically suited for businesses that are high-growth, and that operate at high margins.
Software as a service (SaaS) businesses are one common type of company that often qualify for this type of loan due to their ability to scale quickly.
Lenders will expect you to demonstrate that you plan to use the borrowed funds as growth capital to scale your business through initiatives such as:
- Sales and marketing.
- Product development.
- Hiring new employees.
On the other hand, brick and mortar businesses often don’t qualify for RBF financing.
That’s because they don’t generate the necessary monthly profit margins.
If that describes your business, then you may still have plenty of options, including merchant loans, credit card processing loans, and merchant cash advances that can help you raise needed capital.
RBF – The Benefits
As we mentioned, this type of financing is designed for businesses that are poised for rapid growth.
Companies like this might also attract the attention of venture capitalists.
But not every business owner has grand designs to become the “next big thing” and may not have growth plans that are aggressive enough to catch the eye of a venture capitalist.
However, they are businesses that are ready to scale and appear sustainable – which is what royalty financing lenders are looking for.
In addition, many business owners don’t want the strings that come along with accepting venture capital, such as ceding a stake and a say in the business to the investor.
By turning to revenue-based financing instead of venture capital, business owners can maintain full ownership and control of their company.
However, some lenders are more actively involved than a typical lender would be.
This means they may serve as an unofficial mentor for your business.
This could include anything from:
- Sitting in on board meetings.
- Providing feedback on business plans.
- Offering advice on how to scale.
Revenue-based financing is also a good fit for newer businesses.
Traditional lenders are sometimes skittish to lend money to companies that don’t have a lengthy track record.
But since RBF lenders care more about the projected growth and revenue of a business than its history, they are more comfortable making loans to newer companies.
The Drawbacks of RBF for Small Businesses
Unlike, say, invoice financing, there is a lengthier approval process for royalty-based financing.
That’s because lenders need to not only look at your business’s history and bank accounts but also your business plan and projections for growth.
Because of that, small business owners can expect to wait between two to four weeks for a decision on their application for a revenue-based financing loan.
If approved, you should receive your funding within about 30 days from your initial application.
There are also specific revenue requirements you will need to meet.
Most RBF lenders are looking to fund businesses with monthly revenues of at least $15,000 to $30,000.
In many cases, lenders will also be looking for some degree of consistency in your monthly revenue.
For this reason, many lenders prefer to work with subscription-based businesses that charge users a set monthly fee.
How Can I Get a Revenue Loan?
Unlike a traditional business loan, you can’t simply walk into the branch of your local bank and apply for a revenue-based loan.
This is a bit of a specialty product, and many of the lenders who offer this type of financing are specialists who only offer RBF loans.
Some revenue-based lenders include:
For a more in-depth look at how the loan process works, be sure to read our review of Lighter Capital.
LendGenius has a simple online form if you want to get started and potentially connect with a lender.
It doesn’t get much easier than that!