Did you know that you can take a loan against the future revenue of your business to unlock growth potential?

Start-ups are almost permanently on the hunt for growth funding. Most founders we speak to have a common complaint: they spend far too much time seeking funding, and far too little time on key growth tasks.

 

For new or growing businesses in need of capital, the usual suspects are equity raises, venture capital, crowdfunding, life savings and selling your beloved stamp collection. Traditional debt is an option, but is increasingly difficult to secure, not least because many businesses in the digital age hold no tangible assets to secure the loan.

Enter another lesser-known source of funding, which is growing in popularity across the globe and may well be the best source of growth capital for your start-up business. Revenue-based finance allows you to take a flexible loan against the future revenue of your business and pay that down as you make sales.

How Revenue-Based Finance Works

Revenue-based loans are granted based on regular repayments of a percentage of gross profits. Incoming revenue determines the length of the payback period, with higher gross profits shortening the loan term. 

Here is an example of a revenue-based loan in action:

Beep Beep is an app game developer with several games in the market and some good traction. The founders are looking for funding to hire one more developer and increase marketing. They are confident these activities will grow sales.

Beep Beep is loaned $50,000 under a revenue-based finance model on the condition that they agree to pay back 10% of gross profits until the loan is repaid.

MONTH GROSS PROFIT ($) REPAYMENT ($) BALANCE ($)
1 25,000 2,500 47,500
2 (1,500) 0 50,000
3 40,000 4,000 46,000
4 55,000 5,500 44,500
5 60,000 6,000 44,000

Clearly, our example excludes interest payments but is intended to illustrate the idea of revenue-based loan repayments. Beep Beep are also charged a fee for the financing and repay this over an agreed timeline.

As you can see, Beep Beep’s monthly revenue determines the period of the loan. In ‘bad’ months, the loan repayment decreases in accordance. What you end up with is a loan arrangement that accommodates the uncertain nature of growing a business.


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Holding Onto Your Piece of the Business Pie

As a business owner, you no doubt understand that it’s better to have a smaller fraction of a larger pie than hold on to a small pie. Sometimes selling equity is the necessary step to grow that pie. Part of the founder’s journey is to watch that fraction get smaller and smaller.

Unlike equity raises, debt financing does not shrink the percentage shareholding of the current business owners. Revenue-based financing is an innovative way to grow the pie and hold on to your larger fraction. More pie; happier, wealthier founder.

What You Need to Get a Revenue-Based Loan

Revenue-based finance is best suited to your business if you have:

  1. a stable and/or growing customer base
  2. a strong gross margin of at least 20%

You will need to allow the finance provider access to view your accounting, banking and SaaS reporting platforms in order for them to consider your business for revenue-based finance.

The good thing is that these loans are based on a few key metrics, so don’t require piles of paper reports.

How Long Does it Take to Get Revenue-Based Finance ?

Revenue-based loans are written based on the business’s history and projected revenue, so funding decisions can be made more quickly. Often, you can get funding in as little as 7 days! 

Want More Information About Whether Revenue-Based Finance is Right for Your Business?

There are a number of factors to consider when it comes to the right growth and funding structure for your business. The exciting thing is that there are also a lot of options. If you’re considering growth finance in the form of a government grant (like the R&D Tax Incentive), capital raise, or revenue-based loan, feel free to reach out to entrepreneurial advisory firm BlueRock.

BlueRock supports businesses to create effective growth strategies and access the funding they need to achieve those goals. BlueRock partners with Fundsquire to help growing businesses access revenue-based finance as well as other finance opportunities, and can help you get started on an application. 


This post was contributed by our partners at BlueRock

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