If your business is in need of a business loan and has significant recurring revenues, then you may have been considering revenue-based financing to help provide growth capital. Why revenue-based financing? It’s a chance to get that growth capital without requiring you to give up equity in your company. Find out the benefits of using revenue versus equity below.
What is revenue-based financing?
When trying to get capital for the business, many business owners don’t want to give up equity in the company. That is why revenue-based financing, which is also called revenue-based investing or revenue-share financing, could be the answer you are looking for. Revenue-based financing allows businesses the opportunity to get financing and then pay it back using future revenues. When paying back the loan, you will be making payments based on a weekly or monthly percentage of revenues. These payments are made until the loan is paid off in full.
How does revenue-based financing work
For revenue-based financing, it normally refers to an arrangement where the investors provide financing to businesses showing strong, consistent revenues. The companies that make these revenue-based loans often specialize in certain types of industries, like we at revtap typically work with Consumer and B2B SaaS (software as a service), tech services, and similar companies. Oftentimes, companies use revenue-based financing as an alternative to traditional venture capital or angel investment structures. These traditional structures normally require the business to give up some percentage of equity in the business in exchange for the funding.
Revenue-based financing also offers more flexibility when it comes to the repayment terms, unlike a traditional small business loan that requires fixed monthly or weekly payments. The company that is providing the revenue-based financing gets paid a certain percentage of future revenues until the total repayment amount is reached. Because of that, when revenues are higher, your payments will be higher. When revenues are lower, your payments will be lower.
Pros and cons of revenue-based financing
As with anything in life, there are always pros and cons that can be weighed. It is no different for revenue-based financing, so we take a look at those pros and cons here.
Pros of revenue-based financing:
- Your payments fluctuate with revenues
- More flexible approval criteria than small business loans
- Faster funding than small business loans
- You may avoid a personal guarantee as owner of the company
- No dilution of equity
Cons of revenue-based financing:
- To obtain the financing, company needs significant recurring revenues
- This type of financing is not always available to every type of industry
- The cost of non-dilutive capital is normally higher than traditional commercial loans
With revenue-based financing, companies are going to typically see more flexibility than trying to get a small business loan. Those types of loans normally require the company to be in business at least two years, have good credit scores and strong revenues. The owner of the company can usually avoid a personal guarantee by using revenue-based financing.
While revenue-based financing does not require the company to give up equity in the business, the funding can be more expensive than a traditional small business loan, like you would get with a commercial bank or an SBA guaranteed loan.
Benefits of using revenue versus equity
When using equity for financing, it does allow you to get funding from investors, whether they are angel investors, private equity investors or venture capitalists. Companies can even use a type of crowdfunding, which allows businesses to raise money from a large group of investors.
By using equity, the financing can be structured without payments. These investors own a percentage of the company, so they can cash out when a liquidation event takes place, like the company going public or getting acquired by someone else.
For revenue-based financing, you are not giving up any equity in the company. As the owner, you will still have full control over your company. By using the revenue in the company, you are making payments based on any future revenue you earn. The more you make, the higher your payment. If you have a slower month and less revenue, you would pay less.
How do you qualify for revenue-based financing
Businesses looking to obtain revenue-based financing will have very specific requirements to meet. At revtap, we work with companies with strong management teams in operation for more than two years. In addition, the company must have a minimum Annual Recurring Revenues (ARR) of $200,000.
As mentioned earlier, many lenders work with businesses in certain industries. For revtap, we work with Consumer and B2B SaaS (software as a service), tech services, and similar companies.
During the application process, the business will have to confirm the source of the revenues, as well as show what this new funding will be used for in order to grow the business.
Where to find revenue-based financing
If you are a small business, you normally would start shopping around to check out what financing options are available and which options best fit your business needs. From there, you would see which options you would qualify for.
For revenue-based financing, there are companies that specialize in this type of financing, like revtap. We were developed by founders for founders and want to provide non-dilutive capital to companies while also giving investors a chance to share in the growth of exciting companies.
With revtap, you can repay all or portions of the principal anytime. revtap will take a small share of your monthly revenues until repaid. This is all being done without large monthly payments, no usage restrictions or collateral requirements.
Figuring out which type of financing is right for your business can be confusing. That is why talking with revtap can help guide you down the right path, so schedule a call today!