Operating any business requires a certain amount of giving and taking. If you own a business, you know that capital never comes free.
Looking for funding options can be stressful, especially as a startup. New businesses are subject to much scrutiny from investors and lenders.
Many businesses will choose asset-based lending or exchange owner-equity for capital. However, company’s with unproven business models may find these types of funding to be challenging.
There are some alternative funding options out there that may suit your needs. If you’re looking for alternative funding options, you’ll come across revenue-based financing.
Here’s what you should consider before you choose this option.
This type of alternative financing allows companies to receive capital from investors up front. In exchange, companies promise a certain percentage of future revenue.
This is a type of debt financing, but it’s secured with future revenue rather than personal assets or hard collateral. This could be a good option if you are unable to put up any assets for collateral.
Of course, the loan must be paid back. This is done with monthly payments based on a percentage of the business’s revenue. There are usually no interest rates.
As with any funding option, you’ll come across certain pros and cons.
Pros of This Option
When you choose this option, you don’t have to give up any equity in your company. This is an attractive factor for many business owners, as you may be unsure about the future of your company.
At the same time, you get significant funding from the investor.
This option may pose less risk to you and your business than a traditional loan. Many providers require no personal guarantee or financial covenants.
You won’t need to worry about making a large payment. The payments are based on a percentage of your monthly revenue. This means your monthly payment will be lower if you have a bad month.
You’ll be able to get your money up front. You won’t need to wait for approval like you would with a traditional bank loan.
You just need to complete the application process and meet the lender’s requirements.
Some investors are more interested in the success of your business than gaining their money back. If you do so successfully, you may build a good relationship with this business investor.
Cons of This Option
If you’re a small startup, it could be difficult to acquire this type of funding in the beginning. Many investors look for certain requirements.
For example, your business must be able to prove that you have a consistent monthly revenue of a certain amount. Some require $15K in revenue each month.
You may need to meet other requirements based on your customer base or gross margins. If you choose this option, you should be ready to show your business portfolio.
You will also need to account for a consistent loss of some of your monthly revenue. This will go toward paying back the loan. However, this loss is generally small.
This biggest problem you might find with this option is the lack of regulation. This is a relatively new funding option, and many banks haven’t started doing it yet. Some predatory lenders may lurk around the corner.
You’ll need to look out for lenders who seem untrustworthy.
Although interest is typically nonexistent, some lenders will impose an interest rate. The lack of regulation allows predatory lenders to impose higher than reasonable interest rates.
Keep in mind that high interest rates don’t always equate to more money up front. If you do need to pay interest on the loan, make sure you get an interest rate you’re comfortable with.
Deciding on a Financing Option
When you start to look at financing options, you’ll come across many different options.
Some of these will require you to promise a certain amount of equity in your company. Others might ask for a personal guarantee. This means you become personally responsible for paying the debt if your business fails.
If your business is just starting out, you’ll find it difficult to secure a business loan. This is because your business has not yet established a solid financial history.
Each funding option comes with its own list of pros and cons. When you’re searching for capital, you’ll need to carefully weigh your options.
For many small business owners, the biggest attractor to revenue-based funding is the flexibility of payments and lack of need to give up equity.
Compared to traditional bank loans,revenue-based funding may be more expensive in the long run. However, you benefit from the lack of regulations. You don’t need to deal with extensive credit checks and loan approval.
Look at your company’s finances and decide if you can afford a particular type of loan. The future of your business may rely on it.
The funding option you choose will have real repercussions over the life of your business. We understand that gaining capital from investors is a vital component of running a business.
Investors and banks are just beginning to explore alternative lending options. Many of these alternative lending options haven’t been tried before they emerged in 2018.
Many traditional banks have yet to test the waters with these types of lending. In the future, we may see more banks try it out.
Investing in Your Future
The future of investing is unsure. Investors may begin to explore revenue-based financing and other alternative lending options. This could change the face of money and investing.
You should be invested in the future of your businesses. Many alternative lenders want to see you and your business succeed.
Before you make this decision, you need to do your homework. While a particular option may appear attractive, it could cost you more in the long run. The decision you make will depend on your individual circumstances.
If you’re just getting into the business world, check out our resources. You find a lot of great information to get you started.