Revenue-Based Financing To Grow Your Small Business

If an application is declined, it’s possible the borrower applied at the wrong time with regard to their cash flow. Remember, this product places significant emphasis on monthly revenue, not on 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 that 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.

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. At UCS, we can help you explore your options and point you in the direction of the most sensible choices.

Are Revenue-Based Business Loans Better Than Equity Financing/Venture Capital?

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 with debt financing, you have to pay interest and fees, 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. If your company receives royalties (and other revenue streams), you may also consider royalty-based financing.

How Much Will My Payment Be For Revenue-Based Business Loans?

Your payment will be a percentage of your total daily, weekly, or monthly receipts. This percentage is determined through a series of 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.

How Can I Use The Funds From Revenue-Based Business Loans?

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.

Why Haven’t I Heard of Revenue-Based Business Loans?

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 score, 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.

How Long Will It Take To Pay Off My Revenue-Based Loan?

The amount of 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 off. However, smaller revenue months mean lower payments and a longer time to pay off the loan.

If you’re hoping to pay your loan off faster, work on boosting your revenue.

Why Should I Consider Revenue-Based Financing Over a Traditional Business Loan?

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 possibly a business plan. And conventional business loans tend to focus on a business’s credit history and credit 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 in the past 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.

Can I Get a Revenue-Based Business Loan with Bad Credit?

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’ll be able to 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.