If you are looking to add some cash into your business, you may be considering taking out a business loan. You may have heard about a revenue-based business loan, but wondering what that is? Keep all your options open, as you learn more about revenue-based business loans below.
What is a revenue-based business loan?
A revenue-based business loan is a type of loan that allows the business to borrow against future revenue. When you go through this type of financing, you will receive a lump sum amount of cash that is based on your monthly and annual revenue.
When paying the loan back, you won’t be making fixed monthly payments, like you would on a typical small business loan. However, the lender will take a defined percentage of your total revenue within each repayment period, which is normally weekly or monthly.
As the lender reviews your loan application, they will focus on your revenue stream and your business plan. They want to know what you will be using this money for and how it will help your business grow. Lenders are looking for the potential to increase your company’s revenue. The faster your business grows will lower the risk to the lender.
For revenue-based loans, your payments are based on the amount of revenue your company is bringing in. The lender will take a percentage of those revenues, so if you have a higher revenue month, your payment will be higher. If you have a lower month, the payment would also be lower.
How do revenue-based loans work?
During the application process, the lender will determine how much you can borrow based on the company’s sales. The lender will also consider the payment frequency that would work best for your company, such as weekly or monthly payments.
One of the benefits of a revenue-based loan is they are not bound to the same regulations as a bank loan. Because of this, you typically see approvals and funding taking place in a shorter amount of time. It may take months for a bank to approve a small business loan, but at revtap, the funding process can be completed in as little as five to ten business days.
After agreeing to the terms of the loan, the lender will then provide you with a lump sum payment. From there, the lender will begin deducting a percentage of your revenue, which was agreed upon in the loan terms. This percentage used is determined to make sure your business will not be paying more than it can handle.
What can the funds from a revenue-based loan be used for?
When applying for a revenue-based loan, the lender usually asks you what the funds will be used for. Most times the funds are used to develop new products, venture into new markets or even expand your sales force.
With that being said, companies normally can use the money they receive from the loan in any way you see fit. Borrowers will often use the funds to help them increase their sales and bring in more revenue. By increasing revenues, that means you will be able to pay off the loan quicker and pay less in interest.
How do you pay off a revenue-based loan?
This will all be based on the total amount financed, but these loans are paid off over time. The amount you pay each month is based on the company’s total sales. With that in mind, you could have a few successful months in a row for sales and pay off the loan during your peak season. However, you may have a slower month in sales and your payment would be lower, so it could take longer to pay off the loan in full.
How do you find revenue-based loans?
Small businesses and startups usually can find revenue-based loan options through financing institutions, investment companies, revenue-based financing firms or venture capital firms.
revtap was designed with one goal: To give companies access to non-dilutive capital that was less restrictive than traditional financing. We’re the most founder-centric financing partner out there. Don’t be shy. Reach out to us and say hello, we’re here to help!