Financial growth is crucial to ascertain profitability, especially for start-ups and mid-sized businesses. To obtain economic growth, these companies require a regular influx of funds either in the form debt or equity. Though there are various financing options to choose from, most companies usually opt for debt financing to finance their business growth. While debt financing has certain advantages, it does not suit all sorts of businesses, especially those that generate most of their revenue from subscriptions or they have seasonality effect in their sales graph. This calls for a financing option that brings together the best of all the financing options while providing borrowers with the desired flexibility in terms of EMI, ROI, and credit history, i.e., revenue-based financing.
Let’s demarcate the differences between debt financing and revenue-based financing:
Advantages of Debt Financing:
Anticipated payments: When a business obtains a loan, they know the monthly instalments and the time required to pay them off. Terms and conditions vary if the borrower fails to make a timely payment. This anticipation allows businesses to manage their budget.
Low cost of capital: Debt financing allows businesses to avail loans at a low-interest rate, assuming they have good credit and collateral.
Disadvantages of debt financing:
No fluctuation: When a business doesn’t perform as expected or some unanticipated cost arises, this anticipation can be a drawback because it can put the company in a difficult situation wherein it might become challenging to make a payment.
Personal Guarantee: If a business fails to generate desired revenue, lenders require a repayment guarantee if companies fail to generate the expected revenue.
Stringent: Businesses require having a proper plan regarding what they would do with the money they obtain after taking a loan. These guidelines restrict what they do with the capital.
Advantages of Revenue Based Financing:
Fluctuation: For businesses willing to avail business loans based on revenue, repayment will depend on the actual sales/revenue that month. Such flexibility will enable the start-ups to deal with a situation where they might end up in a bad situation due to unexpected costs.
Flexibility: The capital businesses obtain through revenue-based financing is used for business growth, developing new products, hiring new resources, or improving marketing strategies; RBF provides the tools necessary to invest and improve their business.
No complex interest calculations: as the borrower can understand the simple mathematics of interest calculation, without any hidden costs
No collateral : As it is a tailormade unsecured loan, designed to support start-ups with sound businesses.
No Tenure : As the repayment are linked with sales and not a fixed EMI model, this gives the start-up the requisite flexibility to focus on sales growth rather than balancing expense and income column every month. Thus the interest of lender and borrower are aligned towards a common goal, increasing sales.
Disadvantages of revenue-based financing:
Short term loans: Providers of RBF capital bank on the revenue growth of their borrowers as they expect quicker payment of their loan.
Higher cost of capital: The amount borrowers require paying for availing revenue-based financing is comparatively more (17-22%) than collateral backed debt financing. However it is comparable to NBFC lending rates , plus the Higher ROI is well compensated with flexibility of repayment and higher risk appetite.
In a nutshell, we can infer that not all types of financing fit well for all kinds of businesses, especially IT firms/D2C brands whose monthly revenues fluctuate depending on subscriptions/sales. Fixed loan payments might impede growth, while other forms of financing such as venture capital require giving up control and ownership. With all those drawbacks, revenue-based funding comes to the rescue serving the missing middle. So, if you too are obtaining revenue-based capital, then make sure you get in touch with one of the reputed Revenue-based financing companies for all your revenue-based finance needs.