There are a lot of options out there when it comes to financing your business. But one option that is growing in popularity is revenue-based financing.
You might have heard of it before, but you might not be sure what it is or if it’s right for your business.
What Is Revenue-Based Financing?
Revenue-based financing is a type of non-dilutive funding. This means that instead of giving up equity in your company, you are essentially selling a portion of your future revenue.
Revenue-based financing can be an excellent option for businesses growing quickly and needing capital to scale, but it’s not right for every business.
Let’s take a look at some of the pros and cons of revenue-based financing so you can decide if it’s right for you.
The Pros of Revenue-Based Financing
No Collateral Needed
One of the most significant advantages of revenue-based financing is that you don’t need to put up any collateral.
This can be a massive benefit if you don’t have any assets to use as collateral or if you don’t want to put your assets at risk.
Cheaper Than Equity
Revenue-based financing is also cheaper than equity financing.
This is because you’re not giving up any company ownership, so investors don’t need to worry about the potential upside of your business.
They’re also not taking on as much risk, so they’re willing to accept a lower return.
Faster Funding Timeline
Another significant advantage of revenue-based financing is that it can be much faster to receive funding than other types of financing.
This is because there’s usually less due diligence required, and the paperwork is more straightforward.
You can often receive funding in as little as a few weeks.
Flexible Repayments
Repayments with revenue-based financing are also usually more flexible than other financing types.
This is because they’re based on your revenue, so you can make smaller repayments if you have a slow month.
This can give you some much-needed breathing room when times are tough.
Retain Ownership and Control
Perhaps the biggest advantage of revenue-based financing is that you retain full ownership and control of your company.
This contrasts with equity financing, where you give up a portion of your company in exchange for funding.
You don’t have to worry about giving up any control with revenue-based financing.
The Cons of Revenue-Based Financing
Limited Availability
One of the biggest disadvantages of revenue-based financing is that it’s not always easy to find. This is because it’s a newer type of funding, and there are fewer investors offering it.
That said, it is becoming more popular, and more options are available than a few years ago.
Revenue Required
Another disadvantage of revenue-based financing is that you need to have some revenue coming in before you can qualify.
This can be a problem for early-stage companies that haven’t started generating revenue.
If you’re not generating any revenue, you won’t be able to get funding through this method.
Required Monthly Payments
Another downside of revenue-based financing is that you must make monthly payments, even if your revenue is down.
This can strain your business if you have a slow month or two.
You might also find it difficult to make larger payments when your revenue spikes. This can make it hard to take advantage of opportunities when they arise.
Is RBF the Best for Your Business?
Revenue-based financing can be an excellent option for businesses that are growing quickly and need capital to scale.
But it’s not right for every business.
Consider the pros and cons of revenue-based financing before deciding if it’s the proper funding method. If it isn’t, make sure you research and discover other types of financing that could better suit your business.
