When you’re managing a business, a huge part of your role can be working out where the next block of funding is going to come from. Even if your business generally has a solid turnover, sometimes, you find yourself in dire need of a powerful cash injection. That’s where revenue-based financing can really shine, especially when compared to other methods of fundraising.
What is Revenue-Based Financing?
Revenue-based financing is not a loan. That’s the most important thing to get past, first of all. That might leave many of you looking at me suspiciously, thinking ‘well, what is it then?’, and you’re right to be a little suspicious, with as many rogue traders out there as there are.
In short, revenue-based fundraising is an advance on your businesses incoming cash flow over the next period of time. This can allow you to boost or begin a powerful marketing campaign to get you over a slump, or pay wages that you’d otherwise struggle to. It essentially allows you to keep the business ticking over in the slow periods of the year.
How is it Superior?
At the core, revenue advance fundraising isn’t truly superior to a traditional loan, it’s just different. One of the most attractive features can be the speed at which this kind of fundraising can be granted. Sometimes in business, time is of the absolute essence, and if you leave things too long, the business suffers. That’s where revenue advance fundraising comes in very handy.
What Are The Pros For a Smaller Business?
There are plenty of great benefits to making use of solid revenue based financing, especially for smaller businesses. Here’s a few of them:
- Revenue advances boost funding income at slow periods of the year
- Which means that you can respond to the slowing with a hearty marketing campaign, pulling you out of that slump
- There’s no lengthy application or deliberation period, you’ll see the cash appearing much quicker than other forms of fundraising
- This makes it perfect for businesses that manage a high rate of return through future revenue
- You don’t need to use traditional forms of loans, and the risks they frequently incur
What Are The Shortfalls?
Obviously, like any method of gathering capital, someone’s got to pay the piper. At some point along the way, there’s going to be a catch. Fortunately, with revenue-based fundraising, that catch is pretty straightforward, and easy to plan for.
Essentially, you’re going to end up paying around 50% of the total advance in fees, which makes it comparable to a 50% APR business loan. The exact figures are calculated using risk factors ranging between 1.2 and 1.5.
What you’ve got to bear in mind is that the easier qualification process can make revenue-based financing the most logical, speediest and most effective form of raising capital for your business. Businesses need that sudden injection of funds sometimes to keep running smoothly, and offsetting that against future earnings can be an easy way to get around a potentially fatal problem.