Four Advantages of Revenue-Based Financing

Marty Aquino

Revenue-based financing can be very advantageous to your e-commerce store or startup. Revenue-based financing, also known as revenue-participation or royalty financing, is essentially a small business startup loan with a twist. Instead of a standard, conventional bank loan where your repayment options are tied to a fixed interest rate, your repayment schedule is negotiated and that amount is paid via the agreed-upon percentage of your revenue. This is one of the funding nuances that allows for additional unique advantages for your startup. Each advantage can be more conducive to your company as you grow and scale.

Advantage #1: Stay in Control

Unlike equity investments, revenue-based funding is non-dilutive. In most cases, any time you accept equity investments for your startup funding, it is expected that the investor will take a large or a small stake in your company. This stake, even if it’s only a minority position, will often give the outside investor the ability to influence your company’s direction or key decisions.

For example, a professional angel investor or venture capitalist will often require board seats, pro-rata, information rights, updates and other clauses to protect their investment. If you don’t currently have a board, one will likely be created. This injection of influence can be especially problematic if your company is doing something unique because your investors may not fully understand your specific point of view. Staying in control and keeping ownership ensures your startup’s brain trust remains true to your team’s vision.

Advantage #2: No Collateral

In general, most startup companies will have a challenging time securing the necessary collateral to yield the loan size needed to truly grow its venture. Conversely, even if you did have the required collateral, it may be more efficient and expedient to obtain financing without encumbering your assets. This gives you and your team more options.

If your team doesn’t meet the normal collateral requirements, it’s an automatic nonstarter for conventional banks. Revenue-based lenders don’t have the same restrictive criteria. These innovative lenders give you a strong option to achieve your fundraising goals.

Advantage #3: Flexible Payments Cycles

What happens when you have a slow revenue month? Are you allowed to give your lender or investor a smaller loan payment? If you had a conventional bank loan, you’d be required to make that payment on time, every time — regardless if your team would rather spend the money on payroll or rent. In contrast, revenue-based financing amounts and repayments are tied to a fixed percentage of your revenue. This can be advantageous to cyclical or seasonal business models, like e-commerce, where a bulk of your revenue could be made during a holiday timeframe, for example. Repayment periods are often based on your revenue forecast and sales data versus arbitrary deadlines.

Advantage #4: Speed

It can take one to over six months of paperwork and meeting loan requirements to secure Small Business Administration (SBA) loan funding. It could take you two to four (or more) months to secure traditional bank financing — assuming excellent business, personal credit scores and collateral. Raising angel or venture capital funding could take several months and can be stressful as well as distracting from building your business.

One of the primary advantages of your small business startup versus a large, established company is your agility. Some large companies often take months or years to roll out innovative initiatives, whereas smaller startups can deploy them almost immediately. This nimbleness disparity, or the ability to react quickly, is one of the key drivers of your startup success. Speed-to-funding can make all the difference to your company’s overall success trajectory. Consider revenue-based funders with fast decision engines and actionable offers in days — not weeks.

Revenue-based financing can provide your small business with affordable, nondilutive, unsecured and fast capital. Not all revenue-based financing companies are created equal. Some revenue-based lenders will even beat competitors’ rates. Further, for those startups where traditional bank options may not be possible, revenue-based funders might be a viable option. Similar to choosing team members for your small business, it pays to work with well-suited revenue-based lenders.

Marty Aquino has been a passionate writer on venture capital, technology, forecasting, risk mitigation, wealth and entrepreneurial topics since 2009. He is the founder of Carbonwolf Energy, a venture-capital firm specializing in world-changing and status-quo-defying technologies and people.