Revenue Based Loans

Find the Best Revenue-Based Financing for your Small Business

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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 is 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 a merchant cash advance or business cash advance) and royalty-based financing. There are so many funding options to choose from with revenue-based financing -so let’s take a look.

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’s that have business performance guarantees.

What Types of Revenue-Based Financing Options Are There?

  • 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

What Are the 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

The 5 Best Revenue-Based Financing Options for Small Businesses

Short Term Small Business Loan

Short-term business loans are loans with a repayment cap period of 6 to 18 months. This option is used when traditional business financing is not available due to qualifications. Short-term loans feature a lump sum of money offered up front with a fixed payback amount calculated using a “factor rate,” with a fixed repayment period that is shorter than traditional business products. A term loan for business is popular with small businesses because of the reduced documentation requirements and credit tolerances that are laxer than traditional loans. Compared with other revenue-based financing opportunities, short-term loans have higher approval rates than traditional lending options because of the shorter term and higher costs.

Product Overview

Loan Amount: up to $500,000
Rate: Interest Rate from 9% or Factor rates ranging from 1.09% up to 1.45%
Loan Term: 6 to 18 months in duration (typically 12 months or less)
Fees: Origination Fee range from 0% to 5%
Loan Payments: Monthly payments, Weekly, Bi-Weekly and in some cases daily payments Monday-Friday
Credit Requirements: All credit types considered
Minimum Monthly Business Revenue Requirements: $10,000
Processing Times: Same day to 24 hours

Benefits and Best Uses:

Short-term business financing is great when approval for a traditional loan from a lenderis not available. Small businesses can take advantage of funds for almost any reason, with working capital and smaller purchases being the most popular. Some Short term business loans do not have a prepayment penalty.

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Short Term Small Business Loans

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Invoice Factoring

This type of revenue-based financing allows you to get an advance of invoices sent to clients/customers of up to 95% percent of purchase orders or outstanding invoices. An Invoice finance company will advance a set amount of the unpaid invoice to the business and then collect directly from the client or customer for the unpaid portion.

Product Overview

Rate (Cost of Capital): Factor Rates 1.50% to 2.75% of invoice amount advanced
Fee: Typically a monthly service management fee based on volumes
Credit Requirements: Clients credit being invoiced is vetted not the business producing the invoice

Benefits and Best Uses:

Invoice factoring, once set up with the invoice finance company, can provide money in a pinch and allow a business to continue to operate smoothly. In many cases factoring companies now have web-based portals that will enable owners to upload invoices in real-time to get advances deposited in an operating bank account.

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Invoice Financing

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Purchase Order (PO) Financing

Purchase Order financing allows small businesses to raise money to pay suppliers upfront for verified purchase orders. PO financing will finance an entire PO or a portion of it, depending on the financing structure.  When the supplier is ready to ship, the PO financing company collects payment directly from the customer and will subtract their charges first and then sends the balance of the invoice to the business. This revenue-based financing opportunity is great for companies that deal with suppliers for their business model.

Product Overview

Rate: None
Fee: (Cost of Capital): 1% to 3% fee for each PO
Credit Requirements: All credit considered. Must have good credit history.
Processing Times: 1 week to set up PO financing relationship. Ability to fund PO’s daily once set up.

Benefits and Best Uses

PO financing is popular with small businesses because it helps raise money for large projects without getting a traditional loan. Many call this option growth capital for this reason- as it can help grow the company with an optimal return.

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Purchase Order Financing

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Business Cash Advance

Business Cash Advances (BCA’s), also known as a Purchase of Future Sales Agreements, advances a fixed “lump sum” of money with a discounted purchase price, also known as a specified amount, to pay back. This revenue-based financing option is repaid by taking a fixed percentage of future overall monthly revenue, unlike a merchant cash advance, which takes a percentage of future credit card sales. Fixed daily payments are collected daily or weekly by deducting from a bank account, which is based on the fixed set percentage of future revenue. After every month, an evaluation is conducted of payments received versus monthly revenue. If the fixed payments that are taken are more than the set future percentage of sales deposits then a refund back to the merchant can occur. Repayment continues under this monthly process until the payback amount is paid back in full. There is no term limit with advances as the fixed payback percentage never changes, yet revenues fluctuate. The time frame for payment depends on future revenue. Expectations of repayment are set typically for 6 to 18 months, but again it may be longer or shorter depending on future revenue.

Product Overview

Funding Amount: Up to $250,000
Rate: Factor Rate ranges from 1.10% up to 1.45%(this is not an interest rate)
Repayment Terms: Estimated payback periods are 6 to 18 months, but No term limit
Fee: Origination Fee ranges from 1% to 3%
Payments: Weekly or daily payments Monday-Friday
Credit Requirements: All credit types from Poor to Excellent is considered
Minimum Monthly Revenues: $10,000

Benefits and Best Uses

Traditional business financing is cheaper, but the fact remains that small businesses who are looking at this option do not qualify for traditional loans. BCA is a great alternative to access cash flow when a lender says no! There are no limitations for the uses of money and can be used for a variety of different purposes, but the primary use is for working capital. A BCA does not have a personal guarantee.

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Business Cash Advances

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Merchant Cash Advance

Merchant Cash Advances (MCA’s), also known as a Purchase of Future Sales Agreements, advance a “lump sum” of money up front to a company based on the credit card sales. As far as a revenue loan or RBF option is concerned, an MCA is by far the easiest to obtain. The advance is repaid by future credit card sales by taking a fixed percentage of those future credit card sales credit card revenue until the payback amount is paid back in full. There is no term limit with advances as the fixed back percentage is set against future credit card processing that typically fluctuates. Expectation times to repay are set to be repaid in 6 to 18 months, but again it may be longer or shorter depending on future credit card transactions. If your company needs some lighter capital or a smaller loan amount fast, merchant cash advances are a great way to get cash flow in the door quickly.

Product Overview

Funding Amounts: Up to $250,000
Rate: Factor Rate ranges from 1.15% up to 1.45% (this is not an interest rate)
Terms: Estimated payback periods are 6 to 18 months, but no specific term limit
Fee: % to 3% Origination Fee
Payments: Fixed percentage Splits from future credit card batches
Credit Standards: Poor to Excellent credit considered. All credit types will be reviewed
Minimum Monthly Revenues: $10,000

Benefits and Best Uses

The reality is that an MCA provides funding when traditional financing is not available. The flexibility of repayment, which is attached to the fixed percentage of future sales, is very popular with small companies because it keeps margins and profits intact with a payment that responds to fluctuations. This helps a company that has fluctuating revenue or is seasonal.  You couple that with the limited documentation you provide, Merchant Cash Advance helps companies get approved. There are no limitations to the use of money and can be used for many different purposes, but a majority of money is working capital. An MCA does not have a personal guarantee.

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Merchant Cash Advance

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What are the 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 line of credit offers        
  • Loan or Advance amounts may be limited in duration of repayment compared to long-term financing

The Bottom Line: Advice, Tips, Warnings About Revenue-Based Financing

Revenue-based financing, like any other business funding product, starts with asking the question, why? What are you using the money for? Are you looking at revenue financing because you were declined for more traditional options? How does revenue financing help your company? Did you use a cost versus benefit analysis of the capital you are raising through the receivables of your business? Have you looked at all other financing options and determined receivable financing is the best choice?

How to Apply For Revenue-Based Financing?

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 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!

Frequently Asked Questions

When you are turned down by a traditional lender like banks, investors, or credit unions, account receivable financing products can set in to fill the gap. Speed to access cash flow, as well as flexible credit score requirements, make this financing opportunity desirable. Finding investments in your company, especially from traditional institutions or a private equity firm can be tough.

Revenue-based opportunities are available at a variety of different funding marketplaces, although it is true that a lender like banks, investment firm, and credit unions turn their back on revenue-based financing. A term loan, especially short-term options, can be easier to obtain than say a long-term solution for debt financing.

Yes, you can get approved for business funding. MCA and BCA both accept bad credit, but your terms and cost of capital will be impacted based on personal credit. Having poor credit can significantly impact loan amounts and lender opportunities. The hard truth is that debt funding or investment in your company is based on your credit data. The lower the credit, the harder it will be to find a lender with a viable loan. This is especially true for highly competitive industries like tech companies. Financing firms or lender options will be limited, but as we mentioned, you can find a point of entry with options like MCA and BCA.

You cannot get revenue-based financing if you are a start-up and have no track record of revenue recently to show. Regardless of the financing model, a lender is looking to make an investment in your company or entrepreneurs as a whole. That investment is based on a repayment percentage — and for startups with little to no history of profitability, finding a lender can be incredibly tough. There are alternative lender options for those looking for a smaller amount of investment in their company to get started with growth. However, these debt financing opportunities are limited.

Venture capitalists and Angel capitalists are companies that will invest in companies by taking an equity position in the company in exchange for much-needed capital for the growth in the company. This is considered equity financing and debt financing. Venture debt is a great way to get funding for your ideas, but it’s more difficult to find investors willing to go a round. Equity financing, in general, can be a successful method for some — but you will need the right connections. Venture capitalists or venture capital investors are typically looking for small businesses with a solid start. So, unless you can prove your rate of return as profitable, this type of lender or venture debt route can be difficult to obtain.

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