What is revenue-based financing?
Revenue-based financing is funding that is dependent on the amount of money that your business brings in on a monthly or yearly basis. Most lenders have a minimum annual revenue requirement, so if your business isn’t making much, it may be difficult to secure a substantial loan, line of credit or other form of business financing.
In addition to loans that have minimum revenue requirements, there are also financing services that come with an alternative form of repayment, where the borrower repays the loan using a portion or percentage of their business’ regular income instead of paying through fixed monthly, weekly or daily payment amounts.
How does it work?
Revenue-based financing is a combination of equity and debt financing, which allows new businesses to access loans in exchange for a specific percentage of their monthly revenues that they use to repay the loan. The repayments consist of a principal amount, or initial amount of the loan, multiplied by the repayment cap, or maximum percentage that the lender can pull from the business’ monthly revenue.
When to consider revenue-based financing?
Because access to revenue-based financing is primarily dependent on a business’ monthly or yearly income, this form of funding can help new businesses or owners with poor credit access larger amounts of money at a lower rate than they could with a standard loan.
How much revenue is needed on average to secure a loan or financing?
Most lenders require minimum annual revenues between $25,000 and $150,000 to qualify for a loan or financing. Banks offering large loans may require even higher revenues than that. Typically, it’s best to have an annual revenue above $100,000 to ensure that you’re able to secure access to quality financing.
How to qualify for revenue-based financing
In addition to requiring a minimum annual revenue, many lenders may require a minimum credit score or amount of time in business to be considered for one of their loans.
How to apply for revenue based loans & financing
When applying for any business loan, there are a few documents and pieces of information that are essential to have ready to send to potential lenders:
- Your personal financial information
- Personal credit report
- Business’ credit report
- Business plan
- Income tax returns
- Personal bank statements
- Business bank statements
- Documentation of collateral (if required by the lender)
- Personal contact information
Best options for low revenue companies – $50,000 or less
Lighter Capital – less than 1 year in business
Lighter Capital offers financing of up to $2 million, with repayment caps of 1.35-2.0 times the principal amount. Borrowers can expect to make monthly payments between 2% and 8% of their monthly revenue. Additionally, this lender only works with tech companies in the United States who average at least $15,000 of revenue per month, with gross margins of at least 50% over the last three months.
Fundbox – 3+ months in business
Fundbox offers loans ranging between $1,000 and $100,000, and annual percentage rates starting at 10.1% with a maximum of 79.8%. Like many revenue-based lenders, Fundbox does not have a minimum credit score requirement, and only requires three months in business to be eligible for consideration. They require at least $50,000 in annual revenue.
» MORE: FundBox Business Loan Review
Higher revenue company loans – $50,000 or more
SmartBiz – 2+ years in business
SmartBiz offers financing ranging between $30,000 and $350,000, and annual percentage rates starting at 8.53% with a maximum of just 9.83%. To qualify for a SmartBiz loan, you should have an annual revenue above $50,000 and at least two years in business.
GSD Capital
GSD Capital offers financing between $100,000 and $1 million, with repayment caps between 1.4 and 1.7. Borrowers can expect to make monthly payments of between 3% and 8% of their total monthly revenue. This lender works specifically with SaaS companies in the mountain west of the US, and their loans typically fund within 30 days.
Companies with revenue over $100k
BlueVine – 6+ months in business
BlueVine offers lines of credit ranging between $5,000 and $250,000, and APRs starting at 15% with a maximum of 78%. To qualify, you should have at least $120,000 in annual revenue for a six-month line of credit, and at least $450,000 for a 12-month line.
» MORE: BlueVine Small Business Loan Review
OnDeck – 1+ year in business
OnDeck’s term loans start at $5,000, with a maximum amount of $500,000, or lines of credit up to $100,000. Their APRs range between 16.7% and 99.4% for term loans, and 11% to 60.8% for lines of credit. To qualify, you should have at least $100,000 in annual revenue.
Pros & Cons of revenue based loans & financing
Pros
- Easier to qualify for if you have bad or new credit
- Payments during low-earning months are not as difficult to manage if repayment is made from a percentage of revenue
- Longer repayment terms
- Larger amounts of financing
Cons
- Potential for much higher rates than standard or traditional business loans
- Some forms are slow to fund
- No prepayment incentive
Conclusion
While revenue-based financing may be a viable option for businesses that are just starting out or whose owners have poor credit, it can also be one of the most expensive forms of financing out there. Before committing to a loan, make sure to review all of your business financing options and see if you can qualify for a traditional business loan first.
