Is Revenue-Based Financing Right For Your Ecommerce Business?
Need funding for your new eCom business? Tired of exploring financing options only to find nothing that seems to fit your requirements? Fret not! Have you considered looking into the revenue-based financing option? If not, do it today. Revenue-based financing is best for entrepreneurs who do not want to lose equity or pay hefty interest on the amount they borrow.
Financing for eCommerce business using a revenue-based funding model, you can manage your cash flow prudently because you don’t have to pay it back all at once or via fixed monthly installments. Instead, you can flesh out a payback plan and use a part of your future sales or revenue to make the payment. Yes, for the most part, it is a convenient option.
So, if the banks don’t feel your business is good enough to deserve funding from them, go on and try revenue-based financing. Here we will discuss the points you should know about revenue-based funding so that you can decide whether this financing option is right for your eCom business. So let’s begin:
What does this financing type mean?
So, it is definitely a type of loan that you borrow from the lender, and you promise them to give it back within a timeline you both agreed upon. Now, generally, the mode of payment is a little different than traditional ones. Over time, the lender agrees to receive a portion of your future revenue as payment until a fixed dollar amount is achieved. Here are some advantages of revenue-based funding you need to know:
- The repayment duration is usually flexible. Pay the amount sooner or later, and the lender will not rush you.
- You can take several years to pay back the fixed repayment target amount.
- The fixed repayment amount is usually 1.5 to 2.5 times the total amount (principal amount) you borrowed from the lender.
- Yes, the best part is that revenue-based financers will keep a tab on all the financial aspects of your firm, but they will not get involved directly. So, you will be in total control of deciding what is good or bad for your company. They will allow you freedom, unlike private equity investors.
- You don’t need to sell equity to your financer.
Revenue-based funding is suitable for your company when:
- You are trying to grow your resources and hire a skilled workforce.
- You want to introduce a new product.
- You have just decided to conduct an elaborate marketing campaign.
- Your company is known in the market, but you want to grow bigger and gain capital from Venture Capitalists.
- You don’t prefer debt financing because it needs you to pledge collateral as security or private equity financing. After all, you feel the company is yours, and there’s no reason you should lose control.
Why you should get revenue-based financing
Revenue-based financing is hassle-free:
- The other traditional alternatives such as capital from angel investors or venture capitalists will require you to pay at least 10 to 20 times the principal amount you borrowed from them. However, revenue-based financers aren’t nosy, but they keep themselves invested in your venture because if you succeed they receive better returns.
- Are you not willing to pledge your valuable assets as security against a loan? Well, revenue-based financing is perfect for you. No need to put your assets at stake, you will still get the money you require.
- A quick and convenient way to get money. Preparing several pitch decks and convincing people to invest in your venture can be too strenuous, even disappointing, at times. With revenue-based funding, you can be at peace because if the financer sees potential in your eCom business, they will lend you money that will be usable within a month or so.
However, there are some drawbacks too:
- If you are a startup unsure of whether your business can yield a fixed monthly revenue, stay away from this option.
- A thorough background research is necessary because there are hardly any regulations that govern revenue-based financing institutions. You may fall prey to a predatory loan. Hence, be extra cautious.
- You might not get massive financial assistance. Usually, revenue-based financers might not be able to provide substantial amounts of cash.
Conclusion
So, before you choose any sort of financial assistance, do not forget to factor in the obligations. If you take a loan, you have to repay it no matter what. So, weigh your pros and cons before making a final decision.