Obtaining the funding you need for your business can come in a few different ways as we’ve discussed in previous blogs. This week’s blog will walk you through revenue based funding a bit more to help you understand some of the pros and cons of this path. Again, revenue based funding is based on the revenue of your business now or potential revenue in the future.
So, what are the pros and cons to Revenue Based Funding?
Unlike credit based funding, there is no personal guarantee required for revenue based funding. This means that if your business defaults, the lender can’t come after you personally. You are also able to retain ownership and control with this funding path which means you don’t have to give up any equity to obtain funding. You get to hold on to 100% ownership of your business which is a huge perk.
When it comes to credit for revenue based funding, we’re talking about things like P.O Funding, Merchant Cash Advances or Factoring financing. Some revenue financing lenders will not report to your business credit and this is important when it comes to calculating your DTI (Debt to Income Ratio) or how much money you have coming in versus how much money is going out. If the loan is not reported to your business credit, it will not affect your DTI which will allow you to borrow more money if needed. However, this advantage is lender and product specific.
This is a great benefit if you’re looking for funding quickly because with technology these days, lenders are able to instantly verify your revenue. Funding can come as quickly as within 24 hours from the time you put in your application. This is much different than credit based funding or even asset based funding where the process takes a bit longer.
As I mentioned before, revenue based funding is going to be based on income or proof of potential future revenue which is a big advantage when we’re talking about calculating interest rates and funding amounts. The amount of risk usually determines interest rates so in this path, the lender is able to determine the risk right away based on that income proof and has the ability to grant a lower rate.
Unlike credit based funding where you may only be able to borrow $25-150K, revenue based funding allows for a higher funding amount, think $250K-1 million+. This is again because the lender has proof of income and the amount you can borrow is going to be determined on that as well as your average bank balance. There is also no restriction of funds with this path. Funds will typically be deposited directly into your bank account, unlike with credit based funding where they are given to you on a credit card. The only time you might have restrictions is with Purchase Order funding because you have to use the funds borrowed to satisfy a specific purchase order. With Purchase Order Funding, you still have financial backing which will give you access to the funding and will satisfy whatever orders you need. This advantage is huge for growing your business and getting the funding you need to do that.
Of course, with all of those benefits, there comes a couple of disadvantages that you need to keep in mind. The big one that we’ve talked about a few times now is that you have to be able to provide proof of revenue in order to qualify for these advantages mentioned above. This path also requires third-party verification. The disadvantage here is that it can sometimes slow the process a bit.
Overall, revenue based funding is a great path to consider if you’re trying to obtain funding for your business. The advantages are extremely helpful if you can provide proof of income or future revenue and want to obtain a high amount of funding at a low interest rate.
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