What is Revenue-Based Financing?

What is Revenue-Based Financing?

Revenue-based financing is a term that you may not know, but it’s one you should definitely become familiar with. If relying on your credit score to get your eCommerce business approved for financing seems tough, revenue-based financing may be the solution. Instead of looking at your business’ credit for approval, it looks at your sales volume and account health. This way, you can get capital quickly, based on your sales, instead of relying on the traditional marketplace payout. 

If you want to base the worth of your eCommerce business on your sales and how they bring in capital instead of on your credit limit, then revenue-based financing may be just the thing for you. 

How Revenue-Based Financing Works

Revenue-based financing works best for people who have companies that don’t have the hard assets normally required for financial approval but are generating revenue. eCommerce businesses, which operate through online transactions, are a great candidate for revenue-based financing since they can have revenue patterns that are hard to predict. 

This type of financing works best for companies that have inconsistent revenue flow, because they allow for fluctuations in interest payments. Instead of needing to pay a fixed interest rate with a growing business, revenue-based finances receive a percentage of your income in a set amount of time.  

Basically, business owners use their revenue to get their financing. There’s more flexibility built into revenue-based financing than in traditional methods. If you’re having a slow month, you can pay less because repayments are made as a percentage of your monthly sales. 

Benefits of Revenue-Based Financing 

There are clearly a lot of upsides that come along with using this kind of financing, especially for people running their own eCommerce businesses. Some other pros of revenue-based financing include quick funding and flexible payment cycles. 

Quick Funding

It can be stressful and time-consuming to get funding through more traditional routes. Plus, if you’re focused on how you’re going to get funding, you’ll have less time to focus on your business. That’s why revenue-based financing is a great option when you want to get funds quickly. This form of financing can make data-driven decisions in just a few days and possibly as little as a few hours. This way, you won’t have to waste time worrying when you should be working on your company.

Business Relationships

Another pro of revenue-based financing is that you have the opportunity to build a relationship with investors. Some investors in this type of financing actually care more about seeing your business succeed than getting their money back. Building a good relationship with business investors can give you long-term stability and open up a lot of opportunities. Plus, all you have to do to apply for revenue-based funding is complete the application process and meet the lender’s requirements. 

Flexible Payment Cycles

Most of the time, repayments are at a fixed percentage that you can’t break. This leads to businesses being trapped and unable to not repay the funding. With revenue-based financing, repayments are dependent on what your revenue forecast is and what you’re making that month rather than a set amount. This way, your repayment cycles are a lot more fluid and easy to manage. 

No Collateral 

Possibly the top benefit of revenue-based financing is the fact that there’s no collateral requirements. While rates may be somewhat higher due to this, it might still be a better option for your business because you don’t need the collateral that most traditional financing routes require. 

Drawbacks of Revenue-Based Funding

While there are a lot of benefits to revenue-based funding, as there is with everything, there are also a couple of cons. Knowing both the pros and cons of a financial situation will help you make the best and most informed decision. 

Sharing Data

Something that may deter some business owners from using revenue-based funding is the fact that startups must share their data. While the application process is fairly simple, some people might hesitate at the thought of providing statements and reports, and connecting their advertisement and payment services because of this. It’s up to you to decide if this drawback is big enough that you don’t want to reap the benefits of this kind of financing. 

Low Government Regulation

Since this is a newer form of financing, there’s not as much government regulation as there is with more traditional options. It’s in your best interest to do your own research and learn the reputation of potential investors. Always review your terms of agreement carefully to prevent anything from happening to your business. Also, be sure to look for testimonials and reviews from other clients. 

Not Meeting Requirements

Smaller businesses may have a harder time meeting the requirements necessary to qualify for funding. Investors might look for certain requirements from startups that you don’t yet possess. Some requirements could be hitting a consistent monthly revenue of a certain amount, like $15k per month. Investors will need to look at your customer base and gross margins to determine if you’re hitting their requirements. So, while it is the more flexible option, it’s not completely free of risk. 

Higher Cost of Capital

Another possible drawback is the higher cost of capital using this method. While revenue-based financing can offer you good support and a lower risk of problems, like fixed interest rates, it can also cost you higher capital upfront. Costs can range from 1.1 to 2.5 times the financing amount, so it’s important that you make an informed decision for your business plan. 

Get Financing Based on your Sales Numbers with Payability 

If you’re looking for a revenue-based way to finance your eCommerce business, Payability is a great place to start. Payability is the leading funding platform for eCommerce businesses, and we can provide the growth capital you need based on your marketplace sales. 

With Payability’s Instant Advance, you can get up to $250k to spend on increasing inventory or marketing. It’s a great way to put your growth plans in motion and it’s easy to apply. 

Plus, with Instant Access, you can get access to your payouts as early as the next day. Contact us for more information and apply today! 

Sara Leonard
Sara has always loved books, writing, and the outdoors. She started working for ContentCucumber in the summer of 2019. A native Ohioan, Sara moved to West Virginia in 2017 and now lives over the mountain, where you can still get lost even with a GPS.

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