How Can Seasonal Businesses Benefit from Revenue-Based Business Loans?
Seasonal businesses face a lot of challenges while maintaining their cashflows. There are revenue-roaring periods then there are quieter intervals. In such an ever-changing topography, the conventional funding options with their rigid policies don’t make it stick.
Here, a business loan based on revenue can help terrifically. This business initiative is on the rise as it promotes flexibility and interest adjustment without the tiresome limitations of traditional financing. Let’s take a look at what benefits revenue-based capitals bring to the table for seasonal businesses.
Understanding How Revenue-Based Financing Works
Royalty-based financing or revenue-based financing allows a company or a business to get finance from an investor. And the payback comes from its future revenue without involving any asset pledging.
A company signs a contract detailing the investment’s terms and share of future profits that the investor will receive. Unlike conventional loans, a business loan based on revenue adjusts the payback according to the business’s monthly or annual revenue. If the business’s monthly income is low, the repayment amount decreases and increases for months with higher revenues.
An RBF arrangement ends when the company pays back the agreed-upon maximum amount. Every contract has a different term length. Either the length is defined beforehand, or it continues until the payback is clear [1].
Exploring Benefits Of A Business Loan Based On Revenue
Since there are fewer complications and more flexibility involved in RBF, it makes an ideal fit for seasonal businesses. However, apart from its evident elasticity, there are other rewards RBF platforms bring forth.
Zero Collateral
In a conventional financing approach, companies taking loans must provide tangible collateral like property, cars, or anything valuable. If you back away from repaying the loan, the lender sells the assets to compensate for the loss.
In contrast, a business loan based on revenue doesn’t require collateral, and you can rest assured that the financier won’t sell your assets if there are any fluctuations in the repayment. Any collateral to be eligible for the loan.
Furthermore, the investors can’t portray difficult stipulations on the company by acquiring board seats or other approaches [2]. So you can direct your company to your vision unhindered.
Rapid Capital Access
In today’s fast-paced world, opportunities hurl towards you, and then they do MIA. Hence, prolonged capital acquirements don’t make the ideal choice. Revenue-based financing presents a quicker solution by providing fast access to loans.
Conventional loans usually take months or weeks at the least for approvals. However, in comparison, a revenue-based capital can be up and ready in days. In fact, some companies can help you acquire them in as little as 48 hours.
There is less documentation [3] involved, and businesses can easily grab the capital and seize a growth opportunity. The amount can also help overcome financial challenges allowing you to focus on other important tasks.
No Fixed Payments
Flexibility in business financing is like the background music of success; it’s only missed when it’s absent. Fortunately, a business loan based on revenue frees you from the constraints of fixed monthly payments to repay the loan.
Think of the slow months as a seasonal business owner. The hefty monthly payments can kill your company as you’ll fail to gather up the installment money. RBF, on the other hand, has plans tailored to your revenue cycle.
Resource-based financing platforms charge a fixed percentage. The amount decreases when the revenue decreases and increases once the revenue fires up, liberating you from unwanted worry.
Versatile Financing Options
There are financing options available if you need help navigating through all the investor-capital scenarios. Note that these fixes aren’t available if you go with the traditional capitalization.
- Extending Cash Runway: RBF helps stretch your funds longer, giving you more time before needing venture capital. Plus, hitting development goals along the way can boost your company’s value.
- No Pressure To Choose An Exit Strategy: Unlike VC, which often looks for a quick sale, RBF doesn’t demand an exit strategy. That means you can keep running your company for as long as you want without pressure to sell.
- Flexibility to Sell: With RBF, you’re not locked into any decisions. If you decide to sell your business, you’re not at the mercy of investor vetoes as you might be with VC. As long as you repay the loan, you’re free to sell whenever you choose.
Extremely Cheap
Venture capitals take a hefty toll for every dollar invested in your company, experts conclude. For a single dollar invested, the equity will rise to 10 dollars in the future or even more [4]. Suppose, if you need a capital of 1 million, the investor’s equity with increase to 10M in the future.
Such huge amounts sound almost surreal, but you’ll have to deliver. In contrast, a business loan based on revenue is significantly cheap as it charges a flat percentage of your income and doesn’t treat your company like a money-making machine.
Since there are percentages involved rather than the amounts that are a multiple of the funding provided, the figures significantly decrease as your company expands.
Conclusion
In a nutshell, revenue-based funding offers accessible capital to seasonal businesses looking to achieve growth milestones. The concept isn’t exactly new, but it has recently gained traction in the Asian soils.
There are numerous RBF platforms available today. However, it is essential to select a credible medium for your capital needs. Moreover, ensure to evaluate the terms, mitigate the risks, and consider the impacts before signing up for a business loan based on revenue.
FAQs
Are there any disadvantages of revenue based financing?
Unlike conventional loans, pre-revenue companies cannot take advantage of revenue-based capital as they essentially operate on revenue. So it is essential to have a business with some income.
Is RBF the right choice for a seasonal business owner?
RBF is usually considered a good idea for revenue-generating businesses that want to avail growth opportunities. However, it is still better to consult financial advisors before deciding on anything.
What happens if the seasonal revenue of the business drops unexpectedly?
A business loan based on revenue offers repayment adjustments to income fluctuations, providing a buffer against financial instability during uncertain times. However, if needed, you can also consider selling the company or getting an extension of the payback cap.
Which businesses are eligible for revenue-based funding?
In order to ensure a successful loan application, it is important to have a business operating for at least six months, have a steady income stream to meet a minimum threshold to ensure repayment and have a strategic business plan.
Links
[2]https://flowcap.com/pros-and-cons-revenue-based-financing/
[4]https://choco-up.com/blog/revenue-based-financing-pros-and-cons
