Top 5 Best Revenue Based Financing Options for Small Businesses

Revenue based financing, also referred to as royalty based financing, is a process of raising capital for a business from investors against a portion of the business’s ongoing gross revenue. Here, financiers receive a share of business income until the mutually agreed upon sum has been paid. Revenue based financing is gaining popularity in India as small businesses and start-ups can easily get the required capital without pledging high-end assets or losing company stakes. 

Looking for revenue based financing options in India? Here is a list of the top five revenue based financing options for small businesses and common purposes of availing such financing options. Take a look!

Purpose of Taking Revenue Based Financing 

Small businesses can avail revenue based financing for multiple reasons. Some of these include:

• To get working capital 
• For advertising or marketing purposes to increase revenue
• To generate monthly revenue
• Maintain cash flow, revenue streams
• To expand a business
• To purchase inventory 
• To cover emergency monthly business revenue or account receivable issues

From the above-mentioned piece, it is clear the common needs for opting for revenue based financing. So, let’s learn about the top royalty based financing options in detail so that you can choose the best option as per your business needs.

• Short Term Small Business Loan

Short term business loans are a type of loan that comes with a repayment period of 6-18 months. 

Financiers lend borrowers upfront money with a fixed payback amount. Here, the calculations are done using a ‘factor rate’, and the repayment tenure is shorter than the traditional financial products. This type of financing option is popular among small businesses due to minimal documentation and simple eligibility criteria.  Also, the approval rate is also high when compared to other revenue based financing options.

Best For: Small businesses that face issues getting loans from traditional lenders can avail this type of revenue based financing.

Note: Short term business loan does not come with a prepayment penalty.     

• Purchase Order (PO) Financing

In Purchase Order (PO) financing, small businesses can raise funds for paying suppliers upfront for a verified purchase order. Based on the financing structure of a business, PO financiers can fund an entire PO or a portion of it. When all the products are ready to ship, Purchase Order financing companies can collect payment directly from the customer, deduct the charges and then send the balance of invoices to the company. Purchase Order financing helps small businesses to get funding for big projects without availing traditional loans.   

Best For: This type of revenue based financing option suits best for businesses that depend on suppliers for their business operations.

• Business Cash Advance

In Business Cash Advance, financiers advance a fixed lump sum amount with a discounted purchase rate to pay back. Here, borrowers repay a fixed percentage of future monthly revenue. Further, the repayment is done daily or weekly by deducting from the bank account depending on the mutually agreed percentage of future revenue. A calculation/evaluation is conducted every month to find out the payment received versus monthly revenue. 

During calculation, if financiers find that the payments received weigh more than the predetermined set of future percentage of sales, then the deposited extra amount is refunded. The repayment procedure continues until the entire amount is paid back in full. 

Best For: Small business that fails to fulfil the eligibility criteria set by traditional lenders. 

Note: Business Cash Advance does not have any term limit as fixed payback percentage never changes, but revenues differ. Here, the time limit can range from 6-18 months. Further, this financing option does not require a personal guarantee. 

• Invoice Factoring

Invoice factoring, another popular type of revenue based financing enables borrowers to receive an advance of invoices sent to the customers. The amount can reach up to 95% of purchase orders of outstanding invoices. Here, financiers advance a fixed amount of unpaid invoices from a company and collect payment for the unpaid amount without any inter-mediatory. This type of financing option helps small businesses to continue operations hassle-freely. Additionally, as several invoice financing companies have web-based portals, business persons can now upload the invoice and get instant access to funds in their bank account. 

Best For: Small businesses that need funds for purchasing inventory or pay salaries and have invoices that are due in less than 90 days.

• Merchant Cash Advance   

Merchant Cash Advances allows small businesses to get advance lump sum money based on their credit sales. Here, the repayment process is completed by paying a fixed percentage of future credit sales until the payback amount is fully paid. Borrowers must know that in Merchant cash advance has no term limit as the percentage is allotted on the basis of future credit card, which usually fluctuates. The repayment tenure can range from 6-18 months and can go beyond the stipulated time, depending on future credit card transactions. 

This type of revenue-based financing option suits best for businesses that depend on suppliers for their business operations, such as the best eSIM providers who rely on robust partnerships to offer seamless services to their customers.    

Best For: Small businesses looking for smaller loan amounts urgently can opt for this type of revenue based financing option.    

Acquiring capital becomes easier for small businesses when they resort to digital lending platforms like MANDII mobile app. Here, small business owners can get quick funding without pledging any collateral and against simple eligibility criteria.  Further, business persons can choose their lenders as per their requirements without interacting with multiple lenders.

From the above mentioned list, small business owners can select the right type of revenue based financing. However, business persons must identify their business needs, amount of money required and conduct a cost versus benefit analysis to optimise the usage of borrowed money and ensure sustainable growth.