Did you know revenue-based financing is a popular method of fundraising in the United States?
The convenience of accessing capital and the simpler repayment terms has helped its popularity spread like wildfire. Accordingly, many countries, including India, were quick to adopt it as an alternative to traditional forms of financing.
However, revenue financing is still a nascent concept in India, and many MSMEs are still unaware of its perks and offerings. If you came across this concept recently and wondered how it could help your business grow, make sure to find out how it works and its associated features.
On that note, let us uncover revenue-based financing in brief.
A Brief Introduction To Revenue-Based Financing
Revenue-based financing is also known as royal-based financing. This financing option is directed towards D2D and SAAS businesses and crafted to help them resolve their capital issues.
Recently, it has emerged as one of the most convenient ways of raising capital funds. As an entrepreneur, you can access funds under this arrangement by simply leveraging your projected annual or monthly revenue.
Though the concept of revenue-based manifests traits of both debt and equity-based financing, it is an alternative form of funding. Instead of paying interest or compensating in the form of company ownership, you can repay the borrowed sum from the portion of your business income.
Know How Revenue Financing Works
You already know that revenue-based funding is a method of accessing cash in exchange for a part of projected annual or monthly revenue.
This setup works when a business approaches a fintech company to avail its revenue-based financing solution. Take a quick look at these pointers and an example to gain an insight into how the entire process works.
Suppose an MSME owner requires cash to boost his business capital. He approaches a financial institution to avail revenue financing. Subsequently, the financier follows a couple of steps before offering the required funds.
- The financial institutions ask the MSME owner to provide recurring expense and revenue records to establish the feasibility of projections.
- Based on the figures, a certain percentage of the estimated earning is offered to the entrepreneur for a fixed tenure.
- The MSME owner has to pay a regular share of his earnings throughout the tenor until the predetermined amount is paid off.
Note that the repayment term may vary from one financier to another.
Usually, the repayment pattern is closely linked with revenue. It means a dip in revenue could also slow down the repayment process. Due to a low business cycle, the repayment tenure can become longer.
Key Differences Of Revenue-Based Financing Vs Debt And Equity-Based Financing
The table below offers a basic idea about the primary differences between revenue-based and debt financing –
|Parameter||Revenue-based funding||Debt Financing|
|Collateral||You do not have to provide any collateral to access funds||You may have to provide collateral to access funds.|
|Interest Payment||Interest is not paid on the borrowed sum.||You have to pay interest on the sum you borrow.|
When compared to equity-based financing, you do not have to transfer an ownership stake to the investor (in this case, the financier) when you opt for revenue-based funding.
As discussed, the terms of service often differ from one financier to another. To ensure you bag the best deal, make sure to consider a few things in advance.
Things To Check When Selecting a Revenue-Based Funding Solution
Keep these following points in mind when selecting revenue financing solutions –
Need For Collateral
Usually, businesses do not need to provide any asset as collateral to access capital-based financing. Since the amount is based on estimated earnings, you get to access a higher loan quantum.
Time Taken To Disburse Funds
The faster you can access funds during an emergency, the better it is for the business. So, make sure to weigh in the sanction and disbursal time when choosing a financier.
Usually, financiers extend longer repayment tenure, but the same varies among financiers. It is wise to choose a lender that offers flexible tenure options so you can repay the debt at your pace.
Flexibility In Payment
You should note that the repayment amount is adjusted per your business earnings. In other words, when your earnings are high, the amount you repay is higher. Accordingly, the loan quantum can be paid off faster.
In most cases, you will have to meet multiple requirements and complete formalities to avail revenue-based funding. However, the process of finding the perfect financier is more tedious than all the formalities, especially when so many options are available today.
Revenue-based financing is one of the best alternatives to traditional financing options. It helps MSMEs leverage their projected revenue to account for their current needs easily. Regardless, the convenience of the financing method also depends on your choice of a financier.
So, make sure to become familiar with the terms of service and requirements in detail beforehand. Then again, with the help of online apps like MANDII, you can simplify your quest of finding the best financier and meet your capital requirements in no time.