A business needs cash injections from time to time as its expenses grow and it aims to expand. For most, the obvious options are bank debt and equity-based funding. 

However, these are long-term commitments and should be reserved for huge milestones, like buying a competitor. If you opt for high-stakes financing for standard business needs, it can tie up your cash and won’t care if you have a slow sales month. The lender will still take their cut and leave you cash-strapped. 

Needless to say, you don’t need such pressure for more routine business tasks. And that’s when revenue-based financing can be a promising solution: this funding doesn’t demand collateral or equity and depends on how well your business does. 

This article explains what revenue-based financing is, its standard requirements, and how it can keep your business afloat. Keep reading to fund your business smarter. 

What is Revenue-Based Financing?

Revenue-based financing is a cash advance you repay using a percentage of your business’s future sales. After the qualification process, a lender advances you a lump sum upfront for any business needs you deem urgent. And in return, you agree to share a % of your monthly sales until the set total is repaid. 

Revenue-based financing differs from a standard loan because it doesn’t require fixed monthly repayments: you repay based on the earnings. Moreover, getting this funding means you don’t give up any ownership or control and can keep 100% of your business.

Here’s how to put it:

High sales = bigger repayments. Low sales = smaller repayments. 

Eventually, your cash flow is safe because you don’t have a large payment due when your bank account is low.

Suppose you need $100,000 to repair machinery or start a new marketing campaign. Since your previous sales have been good enough, you qualify. The lender agrees on a 1.2X repayment cap (which will be the total amount you return) and a 6% revenue share per month. 

If we put this into numbers, your total repayment amount against the $100k will be $120,000, and each month, 6% of your revenue will go to the lender until you reach the repayment cap. 

That said, let’s say your business makes $200,000 in sales the first month, and because your repayment is 6%, you pay $12,000 to the lender. 

Then next month, the sales drop to $50,000, and the repayment being a flat %, the lender receives $3,000. 

The cycle will continue until the full $120,000 is paid, with the specific amount depending on your sales.

Qualifying for Revenue-Based Financing

Revenue-based financing is for high-growth businesses with ideally six months of consistent sales history. As funders are betting on your future revenue, they look for a proven track record. 

Also, lenders check your business’s profit margins because it must have enough left over to cover other expenses. If your margins are too thin, even this type of financing can leave you cash-strapped. Put simply, this financing is for companies that are already profitable and need more capital to speed up their growth.

How Can Revenue-Based Financing Help Your Business?

Since the payments of revenue-based financing are a percentage of what you bring in, the cost stays proportional to your success. 

If your sales are low, you won’t have to pay a huge amount (which is typical for other loans), and when things are going well, your higher repayment will move the needle faster. 

That said, here is how revenue-based financing can grow your business without ownership loss and rigid repayment schedules:

Preserve Equity and Control

Selling equity is a prerequisite of most loans which can limit your future wealth. However, revenue-based financing advances you money without requiring you to hand over shares, board seats, or a say in decision-making. 

Put simply, you get the funds while retaining 100% ownership and maintaining other upsides too. When your company grows in the future, you reap the full rewards rather than sharing them with outside investors. 

No Personal Assets Required

Some financing solutions require collateral as a guarantee, which can put your home, savings, and other assets at risk. Luckily, this is not a concern with revenue-based financing because you secure it against your company’s future sales rather than your private property.

If the market shifts or your growth slows, the risk stays within the business entity, and your personal assets are safe. As a result, you can pursue aggressive expansion strategies without the fear of losing your assets. 

Fast Capital Access 

Bank loan applications can remain stuck in paperwork for months because of credit checks and other terms. However, this financing prioritizes speed by using your sales data instead of manual reviews. Funders can review your digital records and approve your application almost instantly, which could put cash in your account in days, not months. 

Fill Cash Gaps

Running out of cash can stall a healthy business, even when you know more money is coming. Therefore, smart business owners use revenue-based financing to fill the gap and keep their momentum going. 

Having enough funds for the ‘in-between’ situation means you can pay your staff and purchase inventory on time. And because of that leverage, you don’t face a cash crunch that often forces owners into expensive decisions.

Flexible Use

Lenders can sometimes restrict how you spend the funds. For instance, equipment financing should only be used for the machinery and tools needed for your business. But with revenue-based financing, you decide where the money goes. 

This freedom comes in handy when your priorities change. You can use the money to secure a bulk inventory discount, pour it into a marketing campaign, or manage payroll. 

Conclusion 

Having to pay a fixed loan installment can mean added stress for a business owner because things aren’t always smooth. And that’s why revenue-based financing is a balanced approach. You repay based on the earnings and aren’t forced to squeeze out business funds for a repayment. 

If you need financing for your unique business situation, ROK Financial is always there. Our solutions can support any business, regardless of its current challenges and goals. Let’s discuss how your money matters and find a better way out.

FAQs

Is there a fixed maturity date for revenue-based funding?

There is no set deadline to finish your payments, as the agreement only ends once you hit the total repayment cap. In case your sales are slow, the timeline extends until the full amount is settled.

What happens during a month of low or no revenue?

After a low or no-revenue month, your repayment amount drops automatically. You pay a fixed percentage of gross sales, so zero revenue means zero payment.

Can a business get this financing alongside other loans or financing solutions?

Yes, revenue-based financing can sit behind a traditional bank loan. Therefore, many businesses use it to bridge cash gaps without violating the terms of their existing senior debt.

Does revenue-based financing require a high credit score?

A high credit score is not a requirement because funders prioritize your monthly sales and cash flow. While they may check your score to rule out major red flags, it won’t be a deciding factor for approval.