A revenue based business loan provides the capital needed to grow your business. This capital comes in the form of a private business loan and comes from a lender who believes in what you’re doing.
Lenders expect these loans to be used to develop new products, expand your sales force, or venture into new markets. They’re not bound by the same regulations as a bank loan. Approvals and funding can be obtained in a relatively short period—much shorter than the months it may take a bank to reach a decision.
Revenue based business loans are all about your earnings—repayment terms are calculated as a percentage of your revenue. When reviewing your loan application, the lender focuses primarily on your revenue stream and your business plan. Lenders look for the potential to increase your revenue. Ultimately, the faster your business grows, the faster you pay off the loan.
So it’s key to have a plan for growing your revenue. You’ll need to present that plan convincingly to the lender.
Another factor lenders consider is your gross margin. Gross margin is your revenue minus the cost of goods sold divided by revenue. Lenders offering revenue-based business loans require a minimum 50% gross margin. This threshold helps guarantee that your revenue stream will be sufficient to support your business expenses as well as the monthly loan payment.
Your credit score and past credit history play little to no role in the approval process. Borrowers with growing monthly revenue can still qualify for a loan even if they haven’t been in business for very long or have had financial problems in the past. Fortunately for borrowers, revenue based loans rarely have any collateral requirements and are another form of unsecured business loans.
Borrowers are also able to obtain higher financing amounts with revenue based loans than with traditional loans. Revenue based business lenders are willing to take on more risk, because the repayment is tied to monthly revenue. On the flip side, the borrower pays more interest on these loans because of the higher risk.
Monthly repayment amounts range from 2% to 8% of monthly revenue. Usually, the amount comes in around 5%. But with higher interest, the ultimate cost of debt over the full loan term will be higher than a traditional business loan. You can expect to pay approximately 1.35 times the amount borrowed over the term of the loan depending on the business profile as well as credit history.
Let’s look at some of the most important pros and cons of business loans based on revenue, so you can make an informed decision.
