Five Things You Should Know
About Revenue Based Business Loans
Business Loans Based On Sales Revenue And Not Credit Score!
When it comes to securing a business loan, many businesses simply lack the collateral and credit history required by banks to qualify for a traditional term loan. This is especially true of online and start-up businesses and can easily apply to established restaurants, hair salons, fitness centers, auto repair shops, or virtually any company.
A Revenue Based Loan is an alternative well worth considering. It's very easy to qualify for a revenue based loan, even with as few as 90 days in business, and the application process is about as simple as it gets when it comes to securing financing, but before you pursue a revenue based loan for your business, here are five important things to know:
- It's Not A Loan! - A Revenue Based Loan is technically not a loan. It's an agreement by a financial institution to purchase a percentage of a company's future sales at a discount in exchange for up-front capital. Because the revenue based loan is not a loan, which means the business is able to pursue other financing options without having to show debt on the books. A Merchant Cash Advance is a specific type of revenue based loan that is based on purchasing a percentage of future credit card sales/billings.
- No Collateral, Personal Guarantee, or High Credit Score Needed - Because a Revenue Based Loan is not a loan and is primarily based on sales revenue with secondary factors such as industry and time in business, there is NO collateral, personal guarantee, or high credit score required to qualify. If a business can demonstrate a minimum of $5,000 to $10,000, or more, per month in sales, through bank statements and/or credit card statements, it's likely it can qualify for a revenue based loan.
- Daily or Weekly Variable Payments - Unlike a traditional term loan where the interest rate is set up-front and payments are for a fixed amount spread over a fixed term; with a revenue based loan payments are calculated as a percentage of deposits and are typically automatically deducted from the business' bank account either daily or weekly. Because the payments are based on a percentage of deposits, in months where revenues are high, total payments will be higher; and in slower months where revenues are lower, the monthly payments will also be lower. This variable payment scheme can be very attractive for seasonal businesses and other companies where revenues may be hard to predict. Also, a string of good months will allow the funds to be repaid much quicker.
- Less Risk Means Higher Rates - While the cost of a revenue based loan is not expressed as an interest rate, if converted to one, you would find it much higher than a SBA Small Business Loan or traditional bank term loan. This is because no collateral or personal guarantee is needed for a revenue based loan. When the banks require collateral and a personal guarantee, it minimizes the bank's risk and shifts a good part of the risk to the borrower. If the borrower defaults on the loan, the bank takes the collateral. Because the risk is minimized, lower rates and longer terms are offered on term loans. With an SBA Loan, the US Government guarantees part of the loan which reduces bank's risk even further. However, a revenue based loan is unsecured. The business owner assumes much less risk since they can't lose their collateral or be held personally liable with their own money, and the cost of using the funds is adjusted up accordingly by the lenders due to the increased risk on their part.
- Good for Expansion & Emergencies But Not Debt Consolidation - Because of the higher interest rates associated with revenue based loans, they would not be considered a good vehicle for debt consolidation. Ideally, a business debt consolidation loan would be at much lower rates and much longer terms. However, revenue based loans can be a great solution for expansion and emergency situations. They key to using revenue based loans for expansion lies in the ability to make money with the borrowed money and achieve a true return on investments of the cost of using the funds. So, expenses like expansion of facitilites to accomodate new business, running a marketing campaign to bring in new business, and acquiring inventory to fill waiting purchase orders are all great ways to use the funds secured through a revenue based loan. Also, real emergency situations like facilitating the ability to make payroll or pay a tax bill are also wise ways to use the higher interest funds.
Keeping these five points in mind should help you determine if a revenue based loan is a good option for your business.
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