How It Works: Revenue Based Financing

 In Featured Stories, Financing

Are you looking for small business loan and alternative financing options?

This is by far the most frequently used option for small business financing. Revenue-based financing allows small businesses to take financing against their continued business success. The oldest form of revenue-based financing is the popular Merchant Cash Advance (MCA). This option truly aligns the interests of both parties. That’s because the financing partner only gets paid if the small business continues to be viable and successful.

It is no wonder then that merchant cash advances continue to see a healthy increase

A 2016 report on Merchant Cash Advance/Small Business Financing Industry by Bryant Park Capital notes that, “the volume of merchant cash advances provided to U.S. SMEs has steadily increased over the last couple years, projected to reach $15.3 billion in 2017, up from an estimated $8.6 billion in 2014.”

Not surprising, considering quick upfront capital can make a huge difference to any small business. Typically, revenue-based financing provides a lump sum of cash to a small business. This is with the understanding that it will dip into a fixed percentage of the future sales. It’s a great option for any small business owner who is looking at short-term financing (between 6-18 months), cash flow and working capital.

A few years back, merchant cash advances were limited to those businesses that received customer payments via credit or debit cards – like bars, nail salons, restaurants, retailers, and other forms of B2C companies. But now, with advancements in the system, merchant cash advances can work for almost any type of small business.

While merchant cash advances give your business that financial backup, it’s also important to know that it directly impacts your daily/weekly cash flow. Good lenders ensure that the funds they advance to merchants ensure healthy growth in the business even when daily/weekly remittances are being taken from the business’s revenue stream. Uninformed merchants can easily fall prey to unscrupulous lenders who can overburden a business’s cash flow. Therefore, small businesses applying for a merchant cash advance should first make an objective analysis of whether this service is best suited for their business.

What you should know about revenue-based financing

  • Quick access and faster approval of the application.
  • Much lower credit score requirement compared to a traditional loan.
  • Qualification does not require secure assets.
  • A fraction of the company’s daily/weekly sales goes toward its outstanding financing amount.
  • Supports payments to be processed against both credit card and cash payments (ACH).
  • Instead of fixed monthly payments regardless of the business performance, the remittances are tied to the success of the business.
  • Flexibility of daily/weekly payments with the ability to true-up payments against the actual performance of your business provides peace of mind and extra cushion when times are lean.
  • There is an immediate impact on your business cash flow.

Revenue-based financing may be a good option when:

  • The small business will not meet SBA loan requirements.
  • There is an immediate need for funding.
  • The company does not have enough collateral for traditional long-term loans.

Revenue-based financing may not be an option when:

  • The funds will provide only temporary reprieve but cause irreparable harm to cash flow.
  • The business already has a number of outstanding loans or advances.
  • Your credit score is below 550. In this case, alternate options like Factoring may be more appropriate.

It’s important to remember that unlike other traditional loan options, which are usually backed by a collateral or federal guarantee, this financing type presents a great risk to the alternative lender. That is why it is a more expensive financing option compared to traditional loans. Businesses should therefore thoughtfully consider when this option makes sense for them and carefully vet the alternative lender.

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