If you’re a business owner looking to acquire capital to grow your operation, there are a number of different options at hand. Yet going down the traditional road of debt and equity-based funding comes with a variety of pitfalls. Chief among them are the personal guarantees that are typically required, or the chunk of your business that you must give away in the form of equity.
This is why revenue-based financing has recently become a popular course of action for many ecommerce sellers. Due to the flexibility it provides, this direction is potentially better tailored to your business and its overall, long-term objectives.
What is Revenue Based Financing? 🚀
Revenue-based financing is a method of giving capital to start-up businesses where investors put up money in exchange for a percentage of ongoing revenues. Returns made to investors typically continue until the initial amount, plus any additional requirements such as fees, are repaid.
It is essentially an alternative to debt and equity-based funding. No upfront ownership in the business is taken, and no personal guarantees are involved. Financing is put forth in exchange for a portion of future earnings.
How does Revenue Based Financing work? 🤔
If provided with capital in this manner, it is assumed that your company will set aside a percentage of revenue in order to repay the advance. This typically occurs on a set frequency, such as on a monthly basis.
Should certain months yield more revenue for your business, this results in a greater monthly payment and a shorter overall repayment period. The inverse is also true. A drop in revenue on certain months means a smaller monthly payment and lengthening of the repayment cycle.
In a practical sense, getting financing involves signing up with a provider and connecting your business's financial and marketplace accounts to determine eligibility. You then select an offer that is based on projected earnings, and begin repaying your advance according to the revenue your business is bringing in.
Generally it is expected that the capital invested is repaid within a few months to a few years.
Revenue Based Financing Pros ✅
- Aligning interests. Both investors and companies receiving revenue-based financing benefit when the business succeeds. If the business is thriving, this means a faster return for those that are putting up capital. In this investment structure, everyone is on the same team.
- Not a bank loan. Bank loans usually require a fixed monthly payment over the duration of the term. It doesn’t matter what revenue looks like. This can saddle businesses with large payments that are often difficult to manage if revenue is on a temporary decline. Revenue-based financing, however, is closely tied to performance.
- Lower cost of capital. The amount that has to be repaid with revenue-based financing will be much less than what an equity investor would receive if your business were to be sold. In this way, there are inherent savings with the revenue-based financing model.
- Less risk. Early-stage businesses likely do not have easy access to commercial loans. Revenue-based financing is a direct way to obtain growth capital without needing to put personal assets at risk.
Revenue Based Financing Cons ❌
- High volume of cash flow. Need to be generating significant revenue on a consistent basis, as you’ll be using this to make repayments.
- A built-in buffer is crucial. Must have healthy gross margins in your business to account for the portion of revenue that will be redirected to paying off any loans.
- Consistent expectation of repayments. Once you have the responsibility to make good on the capital you have been given, returning your investment as a percentage of sales means there is a constant drip of paying back what you owe.
- High APR. When you run the numbers on revenue-based financing, you will often find that the APR is much higher than other financing options such as line of credit.
Revenue Based Financing Cost, Rates, and Terms 💰
Rates and fees for revenue-based financing often fluctuate by lending provider.
It is not unusual to be required to pay a flat fee on what you are given upfront. This can often range between 8 to 14 percent of your advance amount.
You then engage in revenue sharing to be able to reimburse the capital that was injected into your business. This might be between 6 to 12 percent of monthly revenue. It is often dependent on the specific terms of your agreement, which lending provider you are working with, and the level of risk involved in what you plan to use the funding for.
Qualifications for Revenue Based Financing 🟢
Qualifications for financing differ by lender but generally there are requirements in place around the overall stability of your company.
Lenders often like to see that you have been in business for a minimum amount of time (6 months is standard) and are generating a relatively predictable amount in monthly revenue ($10k is a good amount here).
There might also be restrictions in place around how your business is operating, with a preference for businesses that are structured as an LLC or a corporation.
Revenue Based Financing Companies 🏦
Clearco is a lending tool that provides fast funding for online businesses. You are able to apply for an investment by submitting an automated application that connects to your online accounts and measures the historical performance of your business. Clearco does not require equity in exchange for financing, and you do not accrue interest on the payments that you make back. Funding can range from $10k to $20 million, and you typically receive offers within 24 hours.
Wayflyer is another company that provides growth financing to ecommerce businesses. After syncing your marketplace accounts, analytics are used to provide you with an appropriate investment amount. This cash can be used to make inventory purchases or other necessary investments for things like advertising and payroll. You then repay Wayflyer using a percentage of your revenue until the capital is returned, in addition to a flat fee charged for the cash advance.
Uncapped similarly provides no-interest, no-equity flexible loans to accelerate your online business. They primarily offer revenue-based financing that can be used to scale your company without the worry of falling behind if sales decline. You are able to acquire additional funding as your business grows and can apply to find out if you’re eligible for financing within minutes.
View our ecommerce directory for more revenue based funding providers.
Revenue Based Financing FAQs 🙋
What’s an example of revenue-based financing?
Let’s work through a hypothetical scenario. Say you were given a funding amount of $100,000 at a 6% fee with an agreed-upon 10% monthly revenue-share and your business has an average monthly revenue stream of $250,000 with no growth.
The total amount to be repaid would be $106,000 ($100,000 * 6%).
The total you would repay every month would be $25,000 ($250,000 * 10%). You would repay this amount until the total of $106,000 is paid off, which would take nearly 5 months.
Is revenue-based financing a debt?
No, debt financing requires the loan amount to be repaid by a fixed date. With revenue-based financing the length of repayment depends on how much money is being earned by the business.
Why use revenue-based financing over debt financing?
Revenue-based financing offers greater flexibility and freedom. With debt financing, you have to personally guarantee repayment. Also, you have to follow financial performance guidelines that restrict what you can do with the capital.
Why use revenue-based financing over equity financing?
With equity financing, you have to give up a percentage of your business in exchange for an investment. This dilutes your ownership in the company, which can be avoided by using revenue-based financing instead.
Final Thoughts 🕵️♀️
When acquiring start-up capital, revenue-based financing can be used to receive a fair lending amount. This avenue for funding is based on financial history and statistical analysis, not human emotion and other extraneous factors. Bias is taken out of the equation, and it is based purely on projected revenue. Stressful pitches to rooms full of investors or venture capital firms are not required, and complicated plans and proposals do not have to be drafted.
With revenue-based financing, and the services we have highlighted that make this possible, you can simply take your investment and go back to doing what you do best: growing your ecommerce business.