Looking for a Revenue Based Loan?
RBF is often times thought of as a form of business loan yet the legalities which govern the two have significant differences.
With RBF, the lender is essentially purchasing a percentage of a business’ future sales at an agreed upon discount.
The business will receive an advance on its future revenue, which it will repay through a portion of its future revenue stream. A small business loan involves a bank or other financial institution lending a business funds in exchange for fixed payments through a set schedule.
A business loan can have repayment terms for twenty-five years.
RBF is more of a short-term financial solution. Revenue-Based Financing does not come with set repayment terms, the majority of RBF agreements are repaid within six months or a year.
RBF is known to be especially resourceful for a business having operations that have not yet built up enough financial credit to qualify for a traditional business loan, business startups, and small to mid-sized businesses.
With Revenue-Based Financing the business borrowing the funds does not have to trade any percentage of ownership of the business for funding as it would be with equity financing.
Revenue-Based Loans have less risk for startup businesses or a business that is struggling to maintain positive cash flow.
A business’s monthly payment to the investors is a percentage of its cash receipts, or the revenue it has generated.
There are two common forms of Revenue Based Financing:
Variable Collection It is the most used form of RBF. A business takes out a loan for a certain approved amount and repays it each month based on the gross profits of the business.
Flat Fee Funding is somewhat different to Variable Collection. With this form of funding/financing, a business commits to paying a fixed percentage of its future revenues each month for a five year term or less, usually at a rate of only 1%-3%. These monthly repayments usually tend to be lower than repayments in a Variable Collection. Flat Fee Funding is a good option for startup businesses, yet if a business grows and should scale quickly, the business would end up paying much more over the term of the loan.
Non-Dilutive The Founders and Directors shall keep full and complete control over the business and its daily operations. Which can prove to be extremely crucial for a startup business.
There is no personal guarantee needed The Founders and the Directors never need to put forward any personal collateral against the loan, this makes it less of a risky option for the business leadership than a traditional Debt Financing Agreement.
A startup business can secure RBF within twenty-four hours, whereas raising Variable Collection Financing can take months.
Under Variable Collection Financing, the investors have the power to veto a decision to sell the business. RBF allows for the sale of the business if the owners decide to sale their business, yet only when the loan has been repaid.
A Businesses seeking funding/financing has two things which need to be considered. First, the business must be generating revenue, as it will be from that revenue that payments are made to the investors. Second, the business must have strong gross margins in order to provide the needed percentage of revenue dedicated to the loan payments for the investors.