What Is A Revenue Based Loan?
Capital is the lifeblood of every business. While established and big companies easily get credit facilities, small businesses and start-ups face challenges for raising capital in the traditional financing environment. However, the scenario has now changed. Today, start-ups and small businesses can raise funds by alternative financing options like revenue-based loans without depending on investors or financial institutions without losing equity shares or giving hefty interest rates.
So, let’s learn about what is a revenue-based loan, how it works and everything related to it!
Revenue Based Loan: An Overview
Revenue based loan refers to a way of getting a credit facility where small businesses or entities can raise funds on the basis of the ongoing revenues of the company. To be precise, a company can pledge a portion of its annual revenue (based on past sales) in exchange for the borrowed growth capital. Revenue based financing combines the features of debt and equity-based financing.
In revenue based financing in India, lenders/investors/ financiers get periodic payment till the pre-set or agreed-upon money is paid in full. The amount can range between 3X-5X of the invested amount.
Though this financing option shares the features of equity-based financing, start-ups need not give away a part of their ownership for the borrowed money (just as they pay in equity-based financing).
It helps early ventures and SMEs to get access to funds without any form of collateral or equity dilution. No wonder this financing option is becoming popular in India.
Wondering how this revenue based financing works? The following section will clarify your doubts.
Working of Revenue Based Loan
In revenue based financing, businesses, or enterprises approach lending institutions to get funds in return for a portion of projected monthly or annual revenue. Here, financial institutions assess various parameters like cash flows, revenue, growth potentials, scalability, and many other things.
After evaluating these pointers, if financial institutions get convinced with the borrower’s business profile, they lend money at mutually agreed upon terms, i.e. interest rate or fee. So far, the operations of revenue based financing may seem similar to that of Angel investors or Venture capitalists, but the main point of difference lies with repayment structure.
In this financing option, a borrower commits to share a portion of business revenue with a lender. In short, the principal and interest rate or fee (levied by the financial institutions) is paid back from the earned revenues during the course of business.
Advantages of Taking Revenue Based Loan
To alleviate growth capital related issues, small businesses/enterprises/start-ups opt for revenue based loans. Knowing the advantages of availing such financial options beforehand would help individuals to maximise the benefits even more. Read along.
- Collateral-free Loan
One of the prime advantages of availing revenue based loans is that business persons need not pledge any collateral or dilute any stake to get access to funds. This is certainly not the case with angel investors or venture capitalists. Thus, enterprises can retain complete hold of the company and still get the required capital.
- Instant Financial Assistance
Revenue based loans are usually disbursed within a few days of applying. Hence, start-ups or small enterprises can easily get the required fund to meet business obligations.
- Minimal Risk
Revenue based financing involves low risk as small businesses need not pledge any collateral, i.e. high-end assets. Thus, they can apply for it without any worry and get funds readily.
- Flexible Repayment Tenure
In revenue based financing, financiers usually lend money for a long time against flexible repayment tenure. It means borrowers can repay the borrowed money at a relaxed pace as per their suitability.
- Convenient Repayment Facility
Financiers of revenue of the based model allow borrowers to repay the availed sum as per the available revenue. In short, when a business earns more money, it can repay a high amount and vice versa.
- Relaxed Eligibility Criteria
In order to get funding under revenue based financing, borrowers need not have a high credit score or long-term business vintage. The simple eligibility criteria enable small businesses, or start-ups to get access to credit facilities without much hassle.
Popularity of Revenue Based Financing in India
Revenue based financing is at early stages in India. This financing option has huge potential because India has the third startup ecosystem globally. The exact position is unknown as countless start-ups are on their way to go digital. The D2C segment witnessed tremendous growth during the global healthcare crisis. Further, the easy availability of capital in the form of revenue based loans is expected to fuel the growth.
The benefit multiplies when businesses or small enterprises route their financing through MANDII mobile app. Here, in this independent technology platform, a small business can get funding against relaxed eligibility criteria and minimal documentation. Further, they can select lenders as per their requirements and avoid dealing with numerous lenders.
Now that individuals know about revenue based loans, their workings, and benefits, they can easily apply for them and get the required capital. However, they must learn about the associated charges, terms and other factors to avoid any future discrepancy.