Business loans have always been a preferred method of raising funds to maintain an enterprise’s capital flow and meet immediate business requirements. However, with the introduction of Revenue-based financing (RBF) in 2020, there has been a growing shift in borrowing practices among short and medium-scale businesses.
KredX’s revenue-based financing option offers a customised secured and unsecured solution and easy access to funds through a completely online process.
In order to compare RBF with business loans, it is first essential to understand the difference between both financing options. Entrepreneurs can make a better decision that way and optimise their financial standing.
Revenue-based financing, also defined as Royalty based financing, is a financial facility primarily directed towards D2C or SaaS businesses. Enterprises can opt for revenue-based financing to help resolve a capital crisis and keep the business afloat. Under this financing model, an enterprise can raise funds based on their ongoing revenue in exchange for pledging a certain percentage of their projected earnings to the investor.
A business loan is an external financing solution that banks and NBFCs extend. It may or may not require collateral. As with any loan, a business loan creates a debt, which is supposed to be repaid with interest within a particular tenure.
Having understood the definition, let’s now compare RBF and business loan to determine how RBF is different from a traditional business loan, and why it is emerging as one of the potential financial solutions in the Indian market.
Entrepreneurs require funds for fulfilling diverse business requirements like purchasing equipment, expansion of business, restocking inventory, etc. Traditionally, entrepreneurs used to rely on one or another type of business loan to mitigate a cash flow crunch. However, with revenue-based financing, there has been a significant change in borrowing patterns. The reason behind this shift can be understood by comparing several aspects of RBF and business loans, as stated below:
|
Parameters |
Revenue-Based Financing |
Business Loans |
|
Interest |
In revenue-based financing, an entrepreneur is not required to pay any interest on the borrowed fund. Instead, they have to pledge a certain portion of their estimated revenue. |
In the case of traditional business loans, borrowers have to repay the borrowed amount with a certain % of the principal sum as interest. |
|
Collateral |
Revenue-based financing is relatively flexible. They can be secured or unsecured, largely depending on the quantum of funds being raised. |
Most financial institutions extend collateral-free business loans. However, in cases where the borrower does not have a healthy credit or repayment history, lenders may require collateral to extend funds. |
|
Credit Score |
KredX considers various parameters other than the credit score to determine an applicant’s eligibility for RBF. It includes the business’s current, monthly and annual recurring revenue, business type, etc. Thus, entrepreneurs can conveniently borrow funds even if their credit score is low. |
The credit score is one of the primary determining factors of business loan eligibility. If the credit score of an applicant is low, banks charge high interest rates. A poor score can also lead to rejections. |
|
Documentation process |
The document submission and verification process for revenue-based financing is relatively convenient. KredX facilitates a complete digital document verification process, making it more time-efficient and straightforward. |
Every bank does not feature a digital document certification process for business loans. This often makes the application process tedious and time-consuming. |
|
Fund amount |
Business owners can get a substantial amount of funds based on their projected monthly or annual revenues and past earnings. |
If the credit score is low, banks do not approve the entire loan amount applied for. Hence, the received amount might be inadequate. |
|
Tenure |
Revenue-based financing comes with variable repayment tenure and largely depends on the revenue that a firm generates. Businesses have to repay a specific % of their profits. It reduces the strain on revenues during slow or off-seasons. |
Business loan repayment tenures are relatively rigid. Borrowers have to return the borrowed capital along with interest in fixed monthly instalments for a pre-specified period. This often poses a strain on monthly revenues when sales are unusually low. |
It’s imperative to understand that a single solution cannot resolve all types of financial fixes. There are various factors to determine a financing option’s suitability in a particular context. Thus, enterprises must carefully evaluate the points discussed in this rundown of RBF vs business loan to decide on a more beneficial avenue.
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