Revenue based financing has become an increasingly popular alternative funding option for businesses over the past few years. But how exactly does it work and is it the right choice for your company? This in-depth guide will explain everything you need to know about revenue based financing, its pros and cons, qualification requirements, and tips for securing the best rates and terms.
What is Revenue Based Financing?
Revenue based financing (RBF) provides funding to businesses in exchange for a percentage of their future revenue. It is a flexible funding option that allows companies to access capital without taking on debt or giving up equity. The amount funded and the payment terms are customized based on the company’s financials. Payments fluctuate based on monthly revenues.
How Revenue Based Financing Works
With RBF, financing companies provide capital upfront in exchange for an agreed upon percentage of gross revenues until the amount funded is paid back plus any additional fees. Repayment terms are usually between 6 months to 3 years. Payments are made weekly or monthly and vary based on revenues. The better your cash flow, the faster you pay off the financing.
Pros of Revenue Based Financing
- Access to capital quickly and easily
- Repaid from future sales, not tied to assets
- Flexible repayment that rises and falls with revenue
- No traditional credit score requirements
- Keeps ownership control and equity
Cons of Revenue Based Financing
- More expensive than traditional loans
- Gives up percentage of future revenue
- Limited funding amounts compared to other options
- Repayment period can be lengthy
Ideal Candidates for RBF
RBF works best for companies that:
- Have recurring monthly revenue of at least $10k
- Have been in business for 2+ years
- Have revenue growth above 10% annually
- Need funds for expansion or operating capital
- Don’t qualify for traditional financing
Poor candidates are businesses with inconsistent revenue, low margins, or in highly competitive markets.
Qualifying for Revenue Based Financing
- Time in business and consistent revenue are prioritized
- Personal credit scores are not factored
- Annual revenue of $250k+ is recommended
- Financial records will need to be provided
- RBF funders look for future growth potential
Tips for Getting the Best RBF Terms
- Provide 2+ years of financial records
- Have clear growth plans for your business
- Consider multiple RBF companies to compare offers
- Be flexible on repayment term length
- Minimize fees by setting up ACH payments
- Seek funding below your maximum monthly revenue
Revenue based financing provides fast access to growth capital without some of the drawbacks of traditional financing. For qualifying businesses, it can be an attractive funding option. Do your research to find the best RBF provider and terms for your specific business needs.