Revenue-based Financing has been getting significant transactions in Asia and other continents. You can find different sectors approaching RBF to enhance their sales and revenue. It is a financing method used to generate capital in which business owners request RBF investors for the funds in return for a specific percentage for the pre-decided duration without staking any equity. It may sound to every business, but you should know if it fits your business or fulfills your financial requirements. If you can find other financing investors like Banks, Venture Capital, Personal Lenders, and Angel Investors for the loan then why RBF? Let’s analyze its pros and cons and understand its basics.
Pros of Revenue-Based Financing –
1. No Equity or Collateral is Required –
Yes! You read it right. Traditionally, the basic requirement to avail of the business loan is keeping collateral or equity-like property, car, or tangible asset. If you default on repaying the loan, the loan provider sells the staked property and copes up the loss amount. This way, the borrower will always fear losing the staked property. RBF offers you a loan without any equity or collateral.
2. Easy and Quick Access to Capital –
Traditional funding options take so much time to process the loan amount from 15 days to 3 months. It requires a long and tedious method to complete the loan process. However, RBF providers are known for providing easy and quick access as soon as 48 hours to 7 days. RBF companies like Vedfin have automated and AI-enabled software systems to ensure an easy and quick process.
3. Flexible Repayment Methods –
The best part of RBF is offering the flexibility of making repayment on easy terms. During the agreement of RBF, both parties fix up the payment mode and revenue percentage. It helps to repay the loan debt in easy and flexible installments. If the sales go up, the repayment amount goes up, and if the sales go down, the repayment goes down. The method helps to repay even in the low season.
4. Cheaper Than Staking Property –
Traditional lenders need some guarantee in return for providing funds that can be your property, car, or shares. In case of non-payment of the loan amount, lenders cease the property to get the value of funds. The borrower always being in fear of losing the equity. RBF platforms only take flat fees for providing funds instead of taking ownership.
5. Be Your Boss –
Equity investors seek some control over your business along with equity. For example, the investor may ask you for a seat on the board of directors. If you opt for revenue-based financing, you will be your boss and make your own.
Along with focusing on the advantages of revenue-based financing, let’s understand its limitations.
Cons of Revenue-Based Financing –
- Your Company Must be a Revenue-Generating Company –
To apply for RBF, your company should be generating revenue, in other words, funding is not available for pre-revenue business. Many companies also seek MRR (Minimum Monthly Revenue) to provide funds and operating history.
- Limited Funding Size –
The funding size of RBF depends on the revenue of the company. Hence, the funding size is limited. RBF platforms look at the current revenue and the estimated future revenue to process the loan. RBF platforms provide loans accordingly and fix up the agreement as well as the repayment process.
- Monetary Repayment Required –
If you avail of the RBF, you will need only money to repay the fund. The loan amount cannot adjust through equity or property. The lender can pay the loan amount only in monetary value.