Ideally, a small business in need of capital could just simply walk into their local bank, request a certain amount of funding, and then walk out of the bank with cash in-hand. That isn’t reality. For the most part, getting a true bank loan can be a long and exhausting process – just to apply. Once your application has been submitted to the bank, there is about a one in three chance that you’ll be approved. If you do get preapproved, you can expect he extensive amount of due diligence the bank will perform before a letter of commitment is issued, let alone actual funding. This process can The term “revenue-based financing” is used to describe multiple types of business financing on both the debt and equity side. In this article we will focus solely on debt-based revenue based financing.
What is Revenue?
Revenue is all the money a company brings in from their business sales. Revenue can be income made from selling products, selling services or both. While revenue includes all sales, it is slightly different than cash flow, which represents all monies that flow in and out of the business.
What are Expenses?
Expenses are the money a business pays to help run their operations and to help the company create income and profits. Types of expenses include sales expenses, marketing & advertising expenses, payroll expenses, interest expenses, etc. – all fall under the umbrella of costs of goods sold, or cost of doing business.
What is Net Income?
Net income is the profit made from running a business operation. To calculate a company’s net income, you simply subtract total expenses from total revenue. The term net income is often referred to as the company’s “bottom line”. In lending, net profitability is extremely important for traditional lending calculations of debt service coverage ratio. Generally, a lender will look at company’s net income as the driving force for figuring-out how much funding the small business will qualify for, but also for figuring out how much the company can handle in payments.
What is Revenue Based Financing?
In short, revenue based loans are financing facilities based not only on the company’s past revenue performance, but also projecting forward revenue. A lender will look at a company’s total revenue picture, and lend against both the total revenue that’s brought into the company, but will also use cash-flow analysis when determining funding.
Revenue Based Financing Uses?
- Working Capital
- Bridge Loans
- Pay bills
- Pay Taxes
Does Revenue Based Financing Require Collateral?
No. Since revenue based financing is relies almost exclusively on cash-flow, specific collateral isn’t required to get approved and funded. With that having been said, the lender will still place a blanket lien on the company to ensure they are paid back, and may even require a Confession of Judgment (COJ).
How Does it Work?
Revenue based lenders will look at a company’s cash position by analyzing prior business bank statements, and project what they think future revenues will look like. Rather than relying on company financials like income statements, balance sheets, tax returns, etc. the lender will, instead, focus almost solely on the company’s most recent bank statements. They will look at how much the company deposits each month, what the company’s daily balance is each day, what the minimum amount that was in the bank account at any given time, as well as the number of insufficient funds or returned checks the business incurred. Along with business bank statement cash-flow the lender will also run credit checks on both the business and the business owner(s). After the analysis is completed, the funding company will then offer the borrower an amount the lender feels that the borrower can feel comfortable repaying. If the borrower accepts, contracts for the lending amount will be supplied to the applicant, and must be returned signed along with additional documents. If the funder feels comfortable moving forward with funding, they will set-up a way for the lender to verify the company’s bank statements through a 3rd party login service that will allow the lender to see if the bank statement supplied match up with online records. If everything checks-out, the lender will then provide funding to the borrower via wire transfer. Repayment begins almost immediately through a number of repayment options:
- Monthly payments – borrower will send the lender a check each month for a set amount until the loan is repaid.
- Weekly payments – depending on the type of lender or funder, they may offer a weekly payment plan that will either require borrower to send weekly checks, or the lender will automatically deduct a set amount from the business bank account via Automated Clearing House (ACH).
- Daily ACH payments – Funding company will collect a set amount directly from the business bank account each day via ACH for a predetermined amount of time.
- Daily credit card processing withholding – Borrower has a set percentage of each days revenue from credit card transactions withheld and sent to lender until the entire funding amount is repaid.
Types of Revenue Based Financing?
- Fintech loans: True APR based loans with terms that range from 2-5 years, with rates that begin in the high single digits and can go up to the high teens. Payments are paid monthly, and there is generally little to no prepayment penalty for early payoff.
- ACH cash advance: Cash advances are not loans, but are the sale of future business revenue. The funding company agrees to buy a portion of future revenue at a discount, and the repayment happens on a daily or weekly basis.
- Merchant cash advance: Similar to an ACH cash advance, the only difference is how the funding company is repaid. With a MCA the repayment happens on a daily basis by having the lender withhold a portion of daily credit card deposits.
- Invoice Finance: Using unpaid 30-90 invoices as either collateral to obtain financing, or to outright sell those invoices for immediate cash.
How to Get a Revenue Based Loan?
Once you’ve decided on obtaining a revenue-based loan, you should research and find with funding company is best for your needs. There are thousands of lenders willing to offer revenue based financing, yet each offers very different products as far as rates and terms. Finding the best revenue based lender requires lots of research. Once you’ve found the funding company that makes the most sense for what you’re looking to accomplish, they will require the following documents:
- Credit application
- Bank statements
- Credit card processing statements (if MCA)
- Financial statements (if Fintech and if cash advance over $100,000)
- Business license
- Voided Check
- Drivers license