One of the most significant flaws of traditional small business loans is the repayment terms. You must make a fixed monthly payment, even though every company has ups and downs. Many companies cannot qualify for traditional bank loan products for this exact reason. Consistent revenue isn’t possible when your industry comes with busy and slow seasons. If this sounds like your business, Revenue-Based Financing may be the right financing product for your needs.
Revenue-based business loans are easy to qualify for and, depending on your sales volume, even easier to pay back. This unique product is similar to a merchant cash advance, but it’s not just for businesses with high debit and credit card sales volumes. You can also access higher borrowing amounts and longer terms.
Revenue-based financing is sometimes referred to as a “business cash advance” or “revenue-based business loans.” You receive a lump sum that is based on your monthly revenue. But instead of fixed monthly payments, you can make daily, weekly, or monthly payments depending on the type of lender. Like a merchant cash advance, your payments fluctuate with sales volume. But while payments for a merchant advance come from debit and credit card sales, the payments for a revenue-based loan come from your total sales.
Your borrowing amount is based on total monthly receipts. This might allow a borrower to access more significant funding amounts than a merchant cash advance, where the advance amount is only based on debit and credit card sales.
Depending on how your cash flows, the lender will determine what payment structure will fit best (daily, weekly, monthly). The lender will then deduct a percentage of your revenue based on your assigned repayment frequency. This percentage, which usually falls below 10%, is known as a “capture rate.” When you have a high revenue day/week/month, you pay more, and vice versa.
Though payment amounts fluctuate with sales, you must pay back your total amount within a given time frame.
More and more small business owners turn to online lenders when it comes to revenue-based financing and loans. In fact, Morgan Stanley forecasts that by the end of 2020, online lenders or fin-tech companies will reach $47 billion in lending. That’s 16 percent of total U.S. small and medium enterprise approvals.
In a recent Forbes article, small business advisory firm Next Street says there is an $87 billion shortfall in available financing for small businesses. Online lenders offering various alternative financing options, including revenue-based loans, are jumping in to fill that gap for borrowers.
Revenue-based financing allows businesses to put their recurring revenue to good use. If your revenue has improved dramatically over the past three months, you will most likely be able to access a large amount of capital. Traditionally, important factors like credit score or annual revenue will have little (if any) impact on your loan size. With other products, accessing more significant amounts with poor credit or no collateral is challenging.
Perhaps the best advantage of this type of product is the repayment terms. You don’t have to worry about making fixed payments during an unexpectedly slow day, week, or month. Instead, you only pay a fixed percentage of your sales. This is particularly ideal for seasonal businesses. The total cost of the loan decreases when your payments are more spread out. You could use the funds during the slow season without paying off the brunt of the debt until the busy season when sales pick up.
Unlike a merchant cash advance, revenue-based business loans are not exclusively available to businesses that perform high debit and credit card sales volumes. It doesn’t matter which payment method your customers prefer as long as you have high monthly revenue.
Revenue-based financing tends to carry longer terms than merchant cash advances, too. This is because while the latter requires a daily payment in most cases, the former can be paid monthly, weekly, or daily.
Revenue-based financing is often pursued by businesses that cannot qualify for other options or need quick access to capital. These business owners likely have poor credit, making it nearly impossible to obtain term loans or lines of credit. In lenders’ eyes, poor credit increases the likelihood that you won’t be able to pay off the loan on time.
Products like revenue-based financing and merchant cash advances are given high rates and fees to offset this risk. Revenue-based small business loans are usually even more expensive than merchant cash advances because of the higher borrowing amounts and longer terms. Throughout your term, you’ll likely accumulate a significant amount of interest.
|LOAN TYPES||MAX AMOUNTS||RATES||SPEED|
|Merchant Cash Advances||$5k – $1m||Starting at 1-6% p/mo||1-2 business days|
|SBA Loan||$50k-$5.5m||Starting at Prime + 2.75%||8-12 weeks|
|Business Term Loan||$10k to $5m||Starting at 1-4% p/mo||1-3 business days|
|Business Line of Credit||$1k to $1m||Starting at 1% p/mo||1-3 business days|
|Receivables/Invoice Financing||$10k-$10m||Starting at 1% p/mo||1-2 weeks|
|Equipment Financing||Up to $5m per piece||Starting at 3.5% (SBA)||3-10+ business days|
|Revenue Based Business Loans||$5K – $1m||Starting at 1-6% p/mo||1-2 business days|
If you have the required information on-hand, the entire application takes just a few minutes. Funds can appear in your bank account in 1-2 business days. Here’s how to get started:
Before you begin the application process, take some time to make sure this is the right product for your individual needs. Will you be able to use the capital for your desired purpose? Is the repayment structure conducive to your cash flow? Do you know exactly how much funding to request? Answering these questions ahead of time will make the rest of this process much smoother.
The application requires the following documents and information:
You can begin the application process by calling us or filling out our one-page online application. Either way, you’ll be asked to supply the information from the previous section along with your desired loan amount.
Once you apply, a representative will contact you to explain the repayment terms, interest rates, and terms you qualify for. This will ensure that there are no surprises or hidden fees during repayment.
If and when you’ve been approved, funds should appear in your bank account in 1-2 business days.
Your revenue-based loan isn’t just a way to get financing for your company. It’s also an excellent opportunity to start building (or improving) your credit.
Consistently making your business financing payments on time and in full will positively impact your credit. And that means preferred interest rates and terms when you next need business financing.
If an application is declined, it’s possible the borrower applied at the wrong time with regard to their cash flow. Remember, this product significantly emphasizes monthly revenue, not annual revenue or gross margins. Hence, it would be best to have strong sales for the past three months to earn approval. In some cases, you may need to provide statements to confirm that your scheduled payback months also did well in the previous year.
And though revenue-based financing caters to borrowers with poor credit, the reason for the credit issues is relevant. To clarify, while bad credit can be due to circumstances beyond your control, others have so much debt they cannot afford to take on any more. A lender may conclude that taking on more debt would do more harm than good for your company.
At UCS, we can help you explore your options and point you toward the most sensible choices. In this case, we might recommend a different, more affordable business financing tool. Possible examples include business credit cards or even personal loans. These alternatives are usually easier to qualify for than business loans.
Revenue-based business loans bear numerous similarities to equity financing and venture capital. Both options technically involve selling a portion of your revenue. The difference is that you must pay interest and fees with debt financing, but you maintain complete control of the company. On the other hand, with equity financing, you don’t have to pay interest or fees, but you have to sacrifice a percentage of ownership to venture capitalists.
In general, debt financing is typically favored by businesses willing to pay interest and fees to maintain control of the company rather than giving up equity to a venture capital firm. You may also consider royalty-based financing if your company receives royalties (and other revenue streams).
Your payment will be a percentage of your total daily, weekly, or monthly receipts. This percentage is determined through several factors, like credit score, cash flow, and your ability to provide collateral. Similar criteria are used to determine your repayment frequency.
Let’s say your business lender allows you to have a repayment cap rate of 10%. If you made $20,000 in revenue for one month, your payment would be $2,000. But maybe sales slow down the following month, and you only generate $10,000. In this case, you would only have to pay $1,000.
Technically, you can use the funds in any way you like. Your intended purpose of the working capital will likely have zero impact on your application. However, specific initiatives will more effectively capitalize on the advantages of the repayment and fee structure. Earlier, we noted that the loan’s total cost decreases when your payments are more spread out. Thus, you could use the funds during a slow period to prepare for a busy period in the coming months. You’d make a smaller payment when business is slow and a more substantial payment when sales pick back up.
The more time between your slow and busy seasons, the less you’d pay for the loan. You’d pay more if you tried paying it off as soon as possible.
Compared to other business financing products, revenue-based business loans are relatively new. It’s one of the few products that doesn’t prioritize credit scores, and the repayment structure is unique. More and more business lenders have realized that credit score is not always the most accurate indicator of someone’s ability to repay. Many business owners also have poor credit due to circumstances beyond their control. Unfortunately, much of the business financing industry is still figuring that out.
In summary, you probably haven’t heard of this product because only some lenders are shaping their offerings to suit borrowers with poor credit.
The time it takes to pay off your loan depends on how fast your revenue grows. The more significant the revenue, the bigger the payment, and the quicker your loan gets paid. However, smaller revenue months mean lower payments and a longer loan repayment time.
If you hope to pay your loan off faster, boost your revenue!
Getting a traditional bank loan can take days or even weeks and require one or more in-person meetings. They can require additional business documentation, paperwork, and a business plan. And conventional business loans tend to focus on a business’s credit history and score.
You should consider a revenue-based business loan if you’re looking for fast access to money for your quickly growing business. Maybe you have had credit challenges or no formal business plan. Yet now you need money for your company. If you can provide bank statements to verify your consistently growing revenues, a revenue-based business loan could be just what you need.
Yes, this product is available to borrowers with bad credit. This is because accessibility is based almost entirely on monthly revenue. As long as you have strong monthly revenue, poor credit probably won’t prevent you from being approved. Revenue-based business loans tend to have high rates for this exact reason. If you have good or excellent credit, you can access lower interest rates, longer terms, and more convenient repayment terms by applying for another product, like a term loan.
Low credit scores do not significantly harm your chances of getting approved for a revenue-based business loan. At United Capital Source, we’re more concerned about how much revenue your company makes and how much your financing will help you keep building that revenue.