All start-ups have one thing in common: the need for a cash injection to help fund their growing businesses and line them up for success.

Many new companies know of traditional business loans, equity financing, or financing via venture capital. However, a revenue advance is an alternative financing option to rapidly boost cash flow. Unlike a conventional bank loan, a business cash advance is repaid based on future monthly sales.

This revenue-based financing model has many benefits for businesses, but choosing a suitable funding model is crucial for company success. Here we discuss how a revenue advance works and whether this is the right business finance option to help you reach your full potential.

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What is revenue based financing?

Revenue-based financing is whereby a lump sum of money is handed to businesses, while the monthly repayments to the lender are a percentage of business revenue rather than a fixed amount. These types of business loans essentially enable you to get quick access to capital in exchange for a portion of your future income. Revenue based financing is an excellent way to increase cash flow when businesses need it most.

The capital companies receive from this type of business financing is expected to go toward the future growth of the organisation. For example, the capital could finance hiring additional employees, rolling out new marketing campaigns, or developing and selling a new product. This makes the revenue-based finance model an excellent choice for small business owners whose primary goal is growth.

Unlike other types of business financing, there is no equity or personal guarantees involved in a revenue advance. This type of financing is a safer option for start-ups as it ensures the lender has no control over your business. The lack of equity also removes the lengthy process of equity-based investment, giving companies quicker access to cash.

How does revenue-based financing work?

Revenue-based financing provides businesses with flexibility. In regards to loan repayment, for revenue based financing, rather than repaying a fixed amount to a lender each month, you owe a previously agreed fixed percentage of your profits from your business’s daily or monthly sales. Therefore, your repayments increase when your revenue goes up and decrease at times when sales are low. They naturally adapt to current cash flows.

Additionally for revenue based financing, monthly payments are generally capped at a multiple of the initial investment, providing more predictability on the months your business is doing well. This ensures companies don’t end up paying ridiculous amounts to the lender; they pay up to the capped payment on high-performing months and are the pre-agreed percentage on poorer-performing months. With the way revenue based financing works when the cap is hit, you never pay more.

There are two main revenue-based financing models based on the type of repayments you wish to make, both of which are explained below.

Merchant cash advance

A merchant cash advance is a type of revenue-based financing that calculates repayments based on the number of debit card sales or credit card sales companies put through their merchant bank account. Each time the business processes a payment, the lender automatically receives their percentage until the capital and interest rate are paid in full. This means repayments are made automatically, often daily or weekly (depending on sales).

Revenue advance

On the other hand, a revenue advance combines the elements of a merchant cash advance and a more conventional bank loan. Rather than relying on credit or debit card sales, revenue advance financing options take a share of total business turnover. This includes bank transfers and invoices to and from vendors and customers. Repayments are then repaid monthly instead of daily or weekly as with merchant cash advances.

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What is an example of a revenue advance?

Let’s look at a revenue advance example to understand how this type of financing works. Imagine a small business is given a revenue cash advance of $30,000 given they pay back 10% of future revenues to the loan provider. Here is what their repayments look like over the first three months based on their total monthly profits:

  • Month 1: $60,000 profits = $6,000 repayments
  • Month 2: $100,000 profits = $10,000 repayments
  • Month 3: $40,000 profits = $4,000 repayments

This example demonstrates how revenue advances entirely depend on the company’s monthly income. The more money you make, the more you pay back. On the converse, when sales drop, as do repayments. This ensures you’re not struggling to repay a loan your current business can no longer afford.

The flexibility of cash advance loans makes them an excellent option for small businesses as there is less concern over not being able to afford the agreed fixed repayment amounts.

What are the benefits of revenue-based financing?

Revenue-based financing carries several benefits compared to fixed-fee repayment loans or funding via venture capital. Here we look at these benefits to help you weigh up the options for your business.

Flexibility over monthly repayments

The main benefit of revenue-based financing is the flexibility aspect. The repayments entirely align with the company’s revenue, meaning that businesses never need to worry about not being able to pay back their finance providers. This gives businesses the flexibility to grow at their own natural pace and lowers the stress of traditional forms of business funding.

No personal collateral

A revenue advance does not require a personal guarantee as collateral against the loan, meaning you aren’t risking any personal assets for the sake of your business. This is a significant drawback of other business loans and venture capital investments that revenue-based financing models mitigate entirely. It is a lower-risk option for businesses that want the opportunity to scale their company without putting other assets on the line.

Quick cash injection for businesses

A revenue advance bypasses many steps required when obtaining traditional business loans. There is less due diligence required, a quicker valuation process, and no need for a specific personal credit score, all of which are necessary to secure equity financing. This makes it a favourable option for any company looking to obtain funding quickly, sometimes within as little as 48 hours.

Easier cash flow management

The flexibility of all revenue-based financing models makes it easier for businesses to manage their cash flow. However, a revenue advance is even more beneficial than a merchant cash advance in this criteria.

As businesses only need to make monthly repayments (rather than daily or weekly payments through their payment provider), cash flow is even easier to manage! Besides, revenue advance financing goes directly through the lender instead of a payment provider. This gives the company more control over its repayments and improves the visibility of its debts.

Data-driven financing model

The flexible repayment structure means that revenue-based financing is largely data-driven; approval for this type of business funding depends on your previous average monthly revenue and future revenue projections. Therefore, most lenders have advanced analytics tools to assess their applicants’ circumstances quickly and efficiently, reducing the possibility of human bias and giving companies quicker access to funding.

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What are the drawbacks of revenue advance funding?

Despite these benefits, a business cash advance may not be the right funding option for all companies. One major drawback is that businesses need large gross margins for this revenue-based finance to work. Stable monthly revenue is also essential; the loan terms are entirely based on future revenue, so a predictable monthly income can ensure favourable terms.

This type of business finance option must also be spent on specific activities that facilitate growth. The specific restrictions largely depend on your loan provider. Nevertheless, depending on your need for money, revenue based financing may not be suitable.

What businesses benefit most from revenue advance funding?

Revenue advance funding is a suitable option for some business models and a terrible idea for others. But what is the ideal company profile to receive revenue-based finance? Based on the benefits and drawbacks, here are three features that indicate your company could suit a business cash advance:

  • Stable monthly revenue: A revenue advance is a data-driven business loan whose terms and agreed percentage for repayments are based entirely on future predictions. Therefore, this debt financing best suits companies with stable and predictable monthly incomes.
  • Scalable and fast-growing company: Companies need to be fast-growing and have already proved their profitability to be accepted for a revenue advance loan. The pace of growth does not need to be as high as for venture capital financing but must show it can be scalable. After all, revenue-based financing is for the purpose of facilitating growth.
  • Usage of the loan: Capital received from a revenue advance can only be spent on activities that facilitate growth. Certain lenders provide stricter limitations and only let you spend money on specific activities (generally short-term initiatives), so check these are aligned with your business model and growth plan before accepting the terms.

With these three criteria in mind, a few types of businesses are particularly well-suited to revenue advance financing models.

Ecommerce businesses

An eCommerce business is a perfect candidate for revenue-based finance. As these businesses sell products online, it is easy for lenders to analyse their sales and marketing accounts to forecast future predictions. A revenue advance also provides quick access to cash, which is helpful for eCommerce sites that need financing quickly to meet growing demands or roll out new time-sensitive marketing campaigns.

Seasonal businesses

Seasonal businesses also suit a revenue-based finance model due to the performance-based aspect of these loans. During the high season, these companies can receive a quick cash injection to meet the surge in demand, stocking up their inventory and introducing new marketing material. With the subsequent increase in profits, loans can quickly be paid back with the revenue made.

Subscription businesses

As mentioned, small businesses with a steady and predictable monthly revenue are more likely to be approved for a business cash advance. This makes subscription business models another ideal candidate. They have a clear indication of what their monthly profits will look like and can easily reap the rewards of this type of business funding, knowing there will be no issues with making repayments.

How to choose a revenue-based financing lender

Anyone who thinks their business is well-suited for revenue-based financing must choose a lender. But the popularity of business cash advances (especially for small businesses that don’t meet the requirements for venture capital nor have collateral to put against a bank loan) has made the space overcrowded.

As such, finding a reputable lender can be easier said than done. Below are some factors to consider when choosing a lender:

  • Competitive terms: Lenders should work with your company to form the best terms for all parties. The better your business performs, the quicker the loan provider gets its money back, so there is no reason to ever enter into a revenue advance loan with unfavourable terms.
  • Quick processing times: Cash advance financing is supposed to give businesses immediate access to capital. Choose a lender that can analyse your business and improve your cash flow in a timely and dependable manner.
  • Partner mentality: A great financial lender acts as more than a funding provider; they’re also a business partner. Look for companies that have this partnership mentality and are genuinely invested in the success of your business, offering invaluable insights and growth recommendations to see you do well.

Is a revenue advance funding right for you?

Revenue-based finance is the perfect option for new yet growing companies looking for quick access to cash without diluting equity or spending time raising capital. To see whether this funding option is the correct solution for your business, get in touch with our team today. We provide access to financing in as little as seven days from completing your application! Alternatively, we offer several other forms of funding, including the Fundsquire Grant Advance and R&D Tax Credit Loans.

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We have been working with investors, debt finance specialists, grant writers, accountants, and advisors for years, so we know the market better than anyone. Simply contact us for a no-obligation recommendation.

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