Why modern businesses should use revenue based financing to fuel its growth

Revenue-based financing is more than just a new way of funding - it is a crucial enabler to unlock the most important financial tool to profitability - the working capital. Almost every business owner dreams about the "plug-n-play" funding system that covers unplanned expenses and provides financial freedom to explore newer horizons.

The revenue-based financing model is projected to reach $42,349.44 million by 2027, growing at a CAGR of 61.8% from 2020 to 2027.

As the business-financing landscape evolves in a rapidly changing industry, companies need to consider new funding sources. Many business owners have found that revenue-based financing works well as a cash-flow source for their business's day-to-day and working capital requirements.

What is Revenue-Based Financing?

Revenue-based financing (RBF) is a type of debt financing that provides funding to a business based on its revenue streams. This allows companies to access capital without providing collateral or an asset-based line of credit. The concept of RBF is relatively new, but it's gaining traction in the lending industry thanks to its flexible terms and ability to help companies grow their business through expansion or acquisition.

The concept of RBF is relatively new, but it's gaining traction in the lending industry thanks to its flexible terms and ability to help companies grow their business through expansion or acquisition. Revenue-based financing is also known as factoring, accounts receivable financing or invoice discounting.

Source: Revenue-based Financing

Revenue-based financing is similar to lending against assets (such as a mortgage), but instead of using your business's assets as collateral, you're using your future revenue as collateral. The lender will sell the invoices to investors and use the proceeds to fund the loan.

For example, if an investor puts up $100k in exchange for 8% of monthly revenue over 6 months, they would receive $8k per month in cash flow until they recoup their principal plus interest ($100k x 8% = $8k). This allows them to earn an ROI while holding onto their principal (and receiving interest payments).

How does Revenue-Based Financing Offer an Alternative to Traditional Bank Lending?

RBF is an excellent alternative to traditional financing and enables businesses to get the capital they need immediately and on better terms than conventional bank loans. It provides a perfect opportunity for entrepreneurs to sustain their business operations without worrying about dilution or interest payments.

Revenue-based financing can be a great alternative to traditional bank loans, especially for companies with poor credit or turned down by conventional lenders. The reason for this is that revenue-based financing is based on the cash flow of your business rather than the assets it owns. If you have an established company with a healthy cash flow, you could qualify for revenue-based financing regardless of your credit score or financial history.

The traditional bank lending model is a great way to get capital, but it has high-interest rates and restrictive terms. To the borrower, these loans can be a burden. For example, if you need to borrow $5 million and have a business with $500,000 of revenue, you will be charged an interest rate of 10 per cent or more on that loan. That's because banks are looking at your cash flow and not your ability to pay back the loan.

Illustration of an Example of Revenue-Based Financing

In this model, lenders use the company's expected future revenue as collateral for their loans. For example, let's say a company needs $1 million to fund its expansion. Instead of taking out a loan from a bank or other traditional lender, the company can turn to an RBL firm. The lender will then take a percentage of the company's future revenue over time in exchange for the loan.

Here are some examples of revenue-based financing:

  • Factoring is when a business sells its accounts receivable (money owed by customers) to an investor in exchange for immediate cash flow. The factoring company then collects those accounts receivable and pays the business owner when ordered. This is one of the most common types of revenue-based financing because it's fast and easy to set up, and there are no requirements other than having at least $100,000 worth of invoices outstanding at any given time.
  • Leasing enables companies with high growth potential but limited access to capital to obtain assets without making large upfront payments or committing long-term contracts. For example, let's say you want to purchase new equipment for your manufacturing facility but don't have enough capital. You could lease the equipment instead of buying it because leasing allows you to get it immediately without spending all your money upfront. Each month, you pay only what it costs for maintenance and repair of the equipment (usually less than 10% of the original price).

Why Modern Businesses Should Use Revenue-Based Financing to Fuel Their Growth?

The answer is simple: the future of business lies in revenue-based financing. This is a new way of funding that allows companies to grow by using their sales as collateral. With this type of financing, businesses can raise capital without giving up equity or putting up collateral, making it much easier for them to grow.

Data from the Bureau of Labour Statistics show that approximately 20% of new businesses fail during the first two years of being open, 45% during the first five years, and 65% during the first 10 years.

This high failure rate is due to several factors, including lack of capital and access to capital.

Revenue-based financing helps alleviate this problem by providing working capital to SMBs without requiring collateral or personal guarantees from owners. The company's ability to generate revenue would be used as collateral instead.

The advantage of revenue-based lending is that it allows businesses to focus on growing their core business without worrying about meeting strict repayment schedules or paying off large amounts of debt over time.

Benefits of Revenue-Based Financing

The significant advantage of revenue-based financing over traditional loans is that it does not require an existing customer base or collateral (such as real estate) to secure funding. Many companies use this type of financing to grow their customer base. It's also attractive because there are no upfront costs involved with this type of funding — lenders receive their payments once customers have made them.

Source: Revenue-based Financing

While traditional loans require a substantial amount of paperwork and approval processes before they can be issued, revenue-based financing allows businesses to get funding quickly by providing monthly reports detailing their financials and showing proof that they can make payments on time each month.

Revenue-based financing offers several benefits to modern businesses:

Limited Risk for Investors

With traditional loans, there is always some risk involved because the borrower could default on repayment or other obligations. However, the investor risks nothing with revenue-based financing if your business fails because it will only be repaid from your future revenues.

Rapid Access to Cash

Traditional loans are time-consuming and can take weeks or months before they are approved and funded by banks or other lenders. Revenue-based financing offers much faster access to cash because it doesn't require extensive paperwork or documents as traditional loans do. You can often get an application approved within 48 hours after submitting it with just a few simple documents such as proof of identity and address.

Low-risk financing option for the business

Revenue-based loans allow you to decide when and how much you want to borrow, so there's no need to wait months for approval or deal with the paperwork and other administrative burdens. You can also make payments according to your schedule instead of having a monthly payment due date set by a lender.

Quick approval without collateral

Revenue-based financing is often approved within days because there are no credit checks or collateral requirements involved in applying for one — all you need is your company's financial statements from the previous 12 months along with its current bank statements from the past 30 days (if applicable). If approved, funds will be deposited directly into your bank account within one week of approval.

Wrapping Up

Business owners need to think about more than just their profits and losses when making crucial business decisions. Instead, they should consider how those decisions can affect the health of their business in the long run. Modern businesses must adapt and change with the times to stay relevant, and revenue-based financing is a great way to do that.

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