Financing for your small business typically relies on one major factor: your revenue. These loans are also known as working capital loans.
The amount of revenue and your sales shows the strength of your business, which makes lenders more likely to approve your loan application because it shows that you know how to run your business.
Revenue-based loans and financing is a funding that is offered by certain lender where payment amounts end up based on the percentage of one’s monthly business revenue. This type of loan can work well for businesses with a stable income without needing collateral for a traditional loan.
While there are plenty of other factors that contribute to finding financing for your small business, your revenue is an important thing to consider since it can determine the type and amount of financing you are able to get.
Even if you are not “making it big,” your revenue shows lenders that you have a business plan and are executing it. It helps with showing that you know how to run your small business and that you are more likely to pay back your loan.
To some lenders, your revenue has more weight than your credit score. Your credit score is important, but it is not necessarily the determining factor on if you’ll be approved for the loan.
With revenue-based loans, or revenue-based financing, the previous three months of sales are what most lenders will be looking at.
Since repayment of these types of loans are typically based off your revenue, the time it takes to repay your loan can fluctuate.
This means that the faster your revenue grows, the faster you will repay the loan, and then the same goes for the opposite direction.
Because of this, it ultimately determines the length of your loan duration.
Typically, with the revenue-based loans or financing, the lender expects you to have a plan in place to be able to increase your current revenue to have during the application process.
The expectation with this is that the funds they lend will be used to start and support more growth.
Who Is Revenue-Based Loans Right For?
Usually, revenue-based loans are used by businesses that have a steady monthly recurring revenue (MRR). The types of businesses that find these loans the most appealing are:
Businesses that are too small for venture capitalists
There are businesses that are too small to attract venture capitalists, however they still have a solid revenue stream and can grow and be sustainable for a long time.
This could be a good fit for companies that fit this since these types of lenders want growth potential in and aren’t looking for a huge return like a venture capitalist would be.
Business owners that are wanting to retain control of their company
It is possible that a business growing quickly will attract venture capitalists, but they might not be into the idea of giving control to the venture capitalist or diluting their equity.
With a revenue-based loan, you’re receiving a loan that is repaid the lender, but doesn’t need any releasing of an equity stake in your business.
Business that are unable to obtain other types of financing
A revenue-based loan can be a good option for a small business owner that does not qualify for traditional loans.
While a business could be too new, or could lack the personal credit needed, having a strong recurring revenue is what qualifies a business for this loan type.
Startups can get the help needed to build their business faster with revenue-based financing.
Where Can I Get a Revenue-Based Loan?
Finding a lender that offers revenue-based loans can be more difficult than finding a lender that does more common financing.
These types of loans are usually only offered by niche lenders that typically only offers this form of financing.
Revenue-based financing can be an excellent fit if your small business has a stable monthly recurring revenue.
Businesses looking for financing to help grow their business, without wanting to lose some control or dilute their equity, should consider looking at a revenue-based loan.
We can help assist in finding the right lender for your current cash-flow needs. Just Contact Us and we can discuss your options.
