Why use revenue-based financing instead of debt financing?
If you’re looking for funding for your business, you may have found out there are new ways to get cash that isn’t traditional debt financing.
Among those that are the most popular is revenue based financing, also sometimes called a merchant cash advance.
Loans all function essentially in the same way, right?
So why use revenue based financing instead of debt financing?
While the reasons are subtle, they can impact your business in big ways.
Let’s get into some of the reasons why.
Dynamic Minimum Payment
A big thing about revenue financing is that it is closely tied to revenue (shocking, I know) in every aspect of the loan, from qualifying, cash offer amount, down to how payment is structured all are based mainly on revenue.
As you know, debt based financing is structured on a flat set of minimum payments over the course of (typically) 1-3 years, where you pay back the principal and interest monthly until it’s all paid.
Revenue based financing, by contrast, has a rising and falling minimum payment reflecting your most recent level of sales.
If you have a lower-than-expected sales period either from seasonality or a temporary stock-out, your minimum payment for revenue based financing will be reduced accordingly.
By contrast, you are always expected to hit the same minimum payment for a traditional debt-based loan.
If you happen to have some kind of lull in sales, the payment structure will not reflect that.
For this reason, many sellers find revenue-based financing preferable to debt financing.
RBF is Faster than Debt Financing
Traditional debt financing has a lot of steps and requirements that slow the process of receiving funds.
The risk assessment process takes a long time. Lenders check things like your personal credit score, business credit score, business type, length of time in business, balance sheets, profit and loss statements, and more to determine whether or not they will approve a loan for you.
This process obviously takes a long time, and a day within the eCommerce world can delay crucial functions of your business by weeks.
Revenue based financing, however, through the use of technology can hook into whatever platform you’re selling on to see revenue levels and other metrics to generate an offer.
With a process that is largely automated, revenue based financing can get you from requesting cash to having it in your account in as little as 24 hours in some cases.
If you need speed, revenue-based financing is your best option.
Easier Qualification Process
As we touched on a bit earlier, debt based financing looks at a lot of different factors to see if they can lend to a business.
These include things like (but are not limited to) credit scores for you and your business, P&L statements, balance sheets, time in business, type of business, etc. just to name a few.
In some cases, traditional lending institutions won’t even work with online businesses!
Worst of all, for a lot of debt-based lenders, you will have to put up some form of collateral as well to get approved.
Revenue based financing doesn’t have nearly as many requirements.
A RBF based lender can look at the health of your business by diving into the stats generated by whatever platform they sell on, whether that be Shopify, Amazon, Woocommerce, and others, by using software to analyze the health of a business.
So if you’re worried that your business hasn’t been running long enough to generate a high enough credit score, most revenue-based lenders only need about 90 days’ worth of data to see if you can qualify for funding.
With these 3 reasons, you can see why revenue-based financing is preferable to debt financing for a lot of business owners these days.
The speed, ease of stress, and built-in risk avoidance are crucial for businesses to keep up with the pace the current eCommerce industry requires.
If you’re interested in revenue-based financing, you can sign up for Onramp to see how much your eCommerce business can qualify for.