There are a variety of financing options for businesses to choose from. Some of these work for any business, while others are targeted to specific industries or business models.
Most businesses use some debt financing — often in the form of bank loans — to fund their business growth. While debt financing does have some advantages, it is not a perfect model for all business owners. For many businesses, especially those who get most of their revenue from monthly subscriptions, revenue-based financing can be extremely helpful. We are here to break down the differences between revenue-based financing vs. debt financing.
Advantages and Disadvantages of Debt Financing
With debt financing, you receive a designated amount of money that you will have to repay with a fixed percentage of interest. Your previous credit history and where the loan comes from will have a significant effect on the interest rates you receive.
Here are a few advantages of debt financing:
- Predictable payments. When you obtain a loan, you know exactly how much your monthly payments will be, and the exact amount of time it will take to pay them back. The only way that your terms change is if you fail to make a payment. This predictability allows you to easily manage your budget and balance your bank account.
- Low cost of capital. Assuming you have good credit, your loan should have relatively low interest rates.
Here are a few disadvantages of debt financing:
- No fluctuation. If your business under-performs or some major unexpected costs arise, that predictability can actually be a disadvantage. It may put you in a difficult situation where you can’t make the payments you need to.
- Personal guarantee. Banks and other lenders want to be prepared in the event that your business doesn’t generate revenue as expected. That’s why most will require you to personally guarantee repayment.
- Strict. To obtain a loan, you must have – and follow – an exact plan for what you will do with the money. These covenants – or financial performance guidelines – limit what you can do with the capital.
Advantages and Disadvantages of Revenue-Based Financing
With revenue-based financing, which also goes by royalty-based financing (RBF), the amount you pay is entirely dependent on your cash flow for that month. You choose a percentage of your monthly revenue that you will be required to pay, but that actual number will change each month. Most revenue-based providers focus on companies whose primary income comes from monthly subscriptions, such as SaaS.
Here are some advantages of revenue-based financing:
- Fluctuation. Since your income will fluctuate depending on the number of subscribers you have that month, your repayments will as well. This fluctuation gives you flexibility and prevents a situation where unexpected costs put you in a bad situation.
- Flexibility. Most revenue-based financing is used for growth capital, which allows you to use the capital you get for a variety of things. Whether you are looking to develop new products, make new hires, or improve your marketing strategies or tactics, RBF gives you the tools to invest in and improve your business.
Here are some disadvantages of revenue-based financing:
- Need high growth potential. RBF providers are banking on your revenue increasing so that they receive the return on their investment quickly. As FitSmallBusiness puts it, “the RBF provider sees better returns the faster you pay the loan in full. This is one reason the underwriting process is focused not only on your current revenues, but also on your business’ potential to quickly increase revenues.”
- Higher cost of capital. Compared to debt financing, the amount you will generally have to pay is higher to receive this type of capital. FitSmallBusiness says that the typical range for interest is 18-30% of the initial amount of capital provided.
What Does RevTek Offer?
Here at RevTek, we understand that not all types of financing are created equal, especially for technology companies who have significant monthly revenues that fluctuate based on subscriptions. Fixed loan payments can inhibit growth, while alternative forms of financing – like venture capital – require giving up ownership and control.
With all of those drawbacks, we decided to create a simpler, better process. Our model is simple: we provide the capital, and you pay it back in manageable monthly payments based on your monthly, recurring revenue. To be eligible, you do not need to be profitable, but you should have a predictable recurring revenue of at least $500,000 a month. The benefits are substantial.
- We don’t take your equity.
- We don’t take any control or ownership.
- Our terms are simple and easy.
If you are looking to finance your business with revenue-based financing, choose RevTek. Our experienced team can provide the capital you need to expand. Contact us today to learn more about how we can help your business grow.