What is Revenue-Based Financing?
Revenue-based loans are a type of financing that provides alternatives to traditional business financing. Revenue-Based financing (RBF) leverages the business’s sales (revenue) and net profit margins to raise money for needs such as working capital, cash flow, inventory, growth, and emergency infusions of capital. Revenue-based financing agreements can be structured in multiple ways but usually in the form of a business loan or business advance from a designated lender.
The most common types of business funding products for revenue financing are short-term business loans, invoice financing (Factoring), purchase order financing, or future receivables sale and purchase agreements (also known as merchant cash advance or business cash advance), and royalty-based financing. There are so many options to choose from for business financing based on revenue -so let’s take a look.
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How Does Revenue-Based Financing Work?
Most business finance products related to revenue financing will focus on recurring revenue (monthly revenue) by looking at the most recent operating bank statements to determine what is the revenue and eligibility and less focused on gross margins or looking at a profit & loss, balance sheet, and/or business or personal tax returns like a traditional lender would review.
What’s the Difference Between Revenue-Based Loans and Revenue-Based Funding?
The terminology of “funding”, “financing”, and “loans” are commonly interchangeable in the vernacular between small businesses and financing companies, but the truth is there are distinct differences. Revenue-based loans and financing charge interest rates and usually have greater guarantees of the business and owner with both business and personal guarantees in the agreements versus business funding that have business performance guarantees.
Revenue-Based Financing Options for Merchants and Small Businesses
- Short-Term Business Loans
- Invoice Factoring (also known as Invoice financing)- Invoice financing (also known as “Invoice Factoring” or “Accounts Receivable Financing,”)
- Purchase Order Financing
- Future receivables sale and purchase agreement (also known as Merchant Cash Advance or Business Cash Advance)
- Equipment Financing
- Private Revenue Loans
Most Common Needs and Uses of Revenue-Based Financing
- Working Capital
- Monthly Revenue, Cash Flows, and revenue streams
- Advertising/Marketing to increase revenue
- Raising capital to expand or growth
- Inventory or supplies
- Emergency financial relief for monthly business revenues or accounts receivable issues
4 Best Small Business Loans Based on Revenue (September 2023)
Short-Term Small Business Loan
Short-term loans have higher approval rates and lower credit requirements because the term is shorter, between 6 to 24 months. An excellent option for working capital requirements.
Revenue-Based Invoice Factoring
A great solution for business owners, invoice factoring companies purchase invoices from issuers for a fee. The invoice finance company essentially advances money to the issuer and assumes the collection of the invoice. This product accelerates accounts receivable for the issuer to avoid cash crunches.
Business Cash Advance
A cash advance is not a loan but an advance off of future sales of the business at a discount to the funder. Quick funding solution for business owners when traditional financing is not an option due to qualifications. This is a fast, easy solution for business funding.
Merchant Cash Advance
A merchant cash advance is a great alternative to traditional business loans or lines of credit. Often used when a business can’t get approved for traditional options. Flexible repayment turns a simple and fast application process with limited documentation required.
Pros and Cons of Revenue-Based Financing
Pros
- Reduced documentation provided for a credit decision
- Easier to qualify compared to traditional loans
- Speed-Processing times typically can get approved in 1 to 2 days
Cons
- Offers based on current and receivables, not on past sales production
- Rates may be higher than that of traditional loans·
- Fees may be more than traditional loans·
- Terms may be shorter in duration
- May not offer some flexibility traditional loans or lines of credit offers
- Loan or Advance amounts may be limited in duration of repayment compared to long-term financing
Apply For Revenue-Based Financing Today!
AdvancePoint Capital offers an easy RBF business loan experience that can help answer any questions you may have. Our customers love the fast, streamlined process and high approval rates that come from working with us for debt financing and loan options. Applying for an RBF loan with AdvancePoint Capital which is the best revenue-based financing company, is as simple as a 1, 2, 3, 4 process. Start with this online form, then fill out the short application page, wait a few hours for your approval, and then get your money!
