The market for the business has many ups and down to grow and earn more profits. To meet the buyers’ demand, many business owners raise funds through various sources and extend their bar. They can raise funds by opting for business loans, staking or selling off the equity, or Revenue-based Financing. However, availing of a loan from traditional sources or RBF is quite confusing about what best fits your requirement. Let’s comprehend the difference between Revenue-based financing and term loans.
Comparison of Revenue-Based Financing And Term Loans –
To raise funds, an entrepreneur needs to consider both fundraising options that suit their business need. If you are an entrepreneur seeking a loan, you must consider the comparison of both sources by analyzing the below factors –
1 – Risk Factor – Before availing of any loan, you must analyze the risk factor associated with them. In the case of Revenue-based Financing, the loan repayment process depends on the revenue projection of the business unit. You need to repay the amount as a percentage of the revenue. So, if the business earns profit would help you to repay the loan amount comfortably. But if your business confronts challenges and runs into rough weather, you need to resort to debts at much higher rates. Although, there is one more constraint you have to repay the loan amount only as monetary value.
In term loans, the rate of interest, loan amount, and loan repayment terms get fixed only at the time of commencement. It helps you to plan your finances and make provisions for monthly installments.
2 – Cash Flow – The second important factor to consider is cash flow. In Revenue-based Financing, the repayment amount is directly proportional to the income. So, if the monthly revenue goes up only the fixed percentage of revenue needed to pay, it does not impact the cash flow.
In the term loan, you pay fixed monthly installments regardless of your company’s earning revenue. This way, you have to pay a higher percentage of the earned revenue that impacts the cash flow.
3. Rate of Interest – Another influential factor in analogizing between term loans and revenue-based financing is the rate of interest. In Revenue-based Financing, there are no fixed repayment terms as it depends on the percentage of the revenue. So, if revenue-based financing goes for the maximum duration, you may pay more in terms of interest.
In the case of the term loan, the repayment tenor and amount get fixed in the beginning. So, there is no uncertainty and all repayment factors are known that help in financial planning.
After analyzing the above factors, it has been noticed that the cost of revenue-based finance is higher than a term loan. However, revenue-based financing offers more flexibility in availing and paying back the loan in a short duration. Significantly, both term loans and Revenue-based Financing have their share of pros and cons. As an entrepreneur, you need to check your priorities and urgency to choose what is more beneficial to you and suits your business requirement. To apply for a loan via a Revenue-based Financing venture, it is advisable to approach the most reliable and trusted firm. Vedfin provides the best solution for RBF and assistance through advanced technology and specialized financial, business, and technical analysts with extensive experience in nurture-based lending.