Business and Management

The Importance Of Revenue Based Financing

In its simplest terms, revenue-based financing is financing provided to a company, based on potential revenues. The company does not make a monthly repayment for the loan, but the repayments are dependent on the profits that will be taken in by the business.

The more profitable the company is, the higher the sales, which means the higher the monthly interest, which could be a fifth. Lower the company's profits mean less the repayments. You can also get revenue based financing at

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The drawback of revenue-based funding

Price: The biggest downside of these loans is the risk of taking one out in the long term. You would easily pay back two to three times what you lent during the duration of your borrowing.

For the lenders, this is more a venture capital space, where the payout and risk are higher than at a bank. Given that the average small business loan is within the range of 6 to 8 percent, you can take on a lot of excess costs by going with a revenue-based lender.

For example, to get $500,000 from a bank, you'll have to promise to pay them back around $600,000 at an interest rate of 7 percent over the course of five years.

The same credit from a lender based on sales would cost you $1 million or more. Maybe the $500,000 you receive would power your profits, and the remaining $400,000 would end up being a drop in the bucket–so revenue-based funding could be the ideal solution.

There are lots of success stories in software that begin with one guy in a basement and end with an IPO. Also, keep in mind that this model does not set you free from all responsibilities.

 If you fail to repay your loan and your business goes bankrupt, the lenders will come in for your business properties. If you're a company, the loss of computers, equipment, or the intellectual property might mean that.

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