A Guide to Revenue-Based Financing: Everything You Need to Know

According to data from the U.S. Census Bureau, roughly 4 million businesses are started every
year. Whether you own a construction, trucking or landscaping business, a medical supply or e-commerce store, or even a new franchise location, chances are you may be searching for funding solutions.

If venture fundraising, family and friends, or traditional lenders are unable to meet your financial
needs, revenue-based financing might be a good solution.

Revenue-based financing is an alternative method to debt financing that generally provides more flexible payment terms and tends to have less strict eligibility requirements compared to traditional lenders. Keep reading to discover how revenue-based financing works, the types of financing methods offered, and whether or not your business is a good candidate for it.

What Is Revenue-Based Financing?

Revenue-based financing is an agreement between you and the financing source where the financing source purchases a portion of your business’s future receivables at a discount. The proceeds of the purchased receivables are typically paid to the financing source on a daily or weekly basis until the financing source is paid the entire amount of the receivables it has purchased.

Business owners do not need to sign away ownership of their company or meet extensive eligibility requirements that most traditional lenders require. In fact, those businesses whose owners have low credit scores are not necessarily disqualified from revenue-based funding, and those businesses that nonetheless can show strong revenue histories may be very good candidates.

The quick infusion of cash that revenue-based financing can provide can be used to increase inventory, remodel, expand marketing efforts, and purchase new technology or equipment. Businesses like retail stores have to juggle razor-thin margins, which could leave little room for payroll and other operating expenses – not to mention the cost of unexpected emergencies. Other growth businesses with short operating histories may be poised for growth with increased demand, and may not have the cash on hand to hire help to manage it, but may not be good candidates for bank financing. Revenue-based financing can help provide a bit of wiggle room – or extra rope — when you need it most.

How Does Revenue-Based Financing Work?

To successfully secure revenue-based financing for your business, follow these four easy
steps:

• Sign up with a Revenue-Based Finance Provider: Each revenue-based finance provider will have a slightly different sign-on and application process, but many of them will typically require the documented and verifiable financial history of your company,and, as part of their underwriting process, may check to see if you meet a minimum credit score. If you’re able to present your business’s financial accounts to them along with proof of consistent revenue streams, then some of them are likely to send over offers. (Remember that there are many brokers of Revenue-Based Finance, but it is often best to apply directly with a true Revenue-Based Finance Provider who will be directly funding your needs.)
• Read Carefully and Ask Questions: Read through all of your offers and determine which is best for your business. The offer and in certain states, if applicable, the required disclosure forms, will outline the terms and conditions of the agreement, the applicable fees, penalties and the payment terms. Contact your [broker or funder] representative if you need further clarification – so you can make sure you understand your rights and obligations.
• Commit and Sign Your Best Offer: Once you have reviewed the offer, disclosures and all agreements, you can sign all the required documents – usually sent to you via email and signed electronically.
• Set Up Daily (or Weekly) Amounts to be Debited in Accordance with Your Provider’s Payment Terms: Payment options are flexible and can be made daily or weekly, depending on your agreement. Your Revenue-Based Finance Provider should always be open to speaking with you about how best to meet your commitments.

Who Should Take Advantage of Revenue-Based Financing?

Unsure if your business is ready to take advantage of revenue-based financing? We outline a
few scenarios below to give you a better picture of which companies should consider pursuing
revenue-based funding and how they could use their funds:

• Seasonal companies whose sales peak during certain times of the year and need to cover payroll expenses on the off-season;
• Businesses that are releasing a new product and need funding for inventory and marketing initiatives so as to keep up with demand and anticipated demand;
• Growth-stage companies with solid markets that are too new or too small for venture capital investment.

Revenue-based financing provides a viable alternative to both debt financing and private equity financing.

Debt Financing

While debt financing allows business owners to retain more company ownership and control than equity financing does, it can be risky as lenders may require personal property (your house, your car, etc.) as collateral and/or personal guarantees. Often the value of the required collateral substantially exceeds the amount you borrowed, which means you tie-up a lot of value for no reason.

Equity Financing

Equity financing, on the other hand, often provides equity investors with substantial control over the decision-making, management and activities of the company. Often, this kind of investment is attractive to investors in cases where companies have the potential for exponential growth, and it is also used when existing owners are raising money among themselves.

Benefits of Revenue-Based Financing

Revenue-based financing has numerous benefits compared to other methods of finance, including traditional lending. Keep reading to learn of its many benefits, outlined below:

• Non-dilutive: You don’t need to part with any equity or control and the company remains 100% your own. This is vital for newer companies or franchises that are opening up another location and need cash fast.
• Payments are flexible: Instead of a rigid payment structure, revenue-based financing allows you to transfer receivables on a daily or weekly basis. You can also pay your obligations under the agreement sooner, if you can, although you may or may not realize any savings from doing so.
• Faster funding process: The traditional lending route can take months to secure and disburse financing. With revenue-based funding, your funds are accessible in your bank account in only a matter of days.

Is Revenue-Based Funding Right for You?

While revenue-based financing can help you to grow your business, there are a few things to
take into consideration before diving right in. If you’re still in the development phase of your
company, then chances are you may need to wait before getting started with financing. Use our
checklist below to see if revenue-based funding could be right for you:

• Your company has a stable cash flow that you expect to continue or grow, so you can fund your obligations under the receivables purchase agreement
• Ensure you have a stable market or that you are continually expanding into new markets to extend your reach.
• Have a clear picture of your business financials, including your debt, revenue, operating expenditures, and the budget allocated for any future events, planned and unplanned.

While every company and business model is different, these guidelines should give you a good
idea of whether or not revenue-based financing is right for you. Should you jump into financing
too soon, you can risk taking on more than you bargained for.

At Mantis Funding, we’ll help you get the most out of your revenue-based financing options.
Simply fill out an application for funding today to get started and see if you qualify!

About Mantis Funding

Mantis Funding is a business financing solutions firm catering to small and mid-sized business owners in the United States.