Also known as Royalty-based financing, it is a loan or financial capital that prospective investors give to small or growing businesses and the repayment of such loans is based on a percentage of the business revenue, unlike a fixed amount. For very established business’ this can act as equity financing, and for growing or small businesses, royalty-based financing is a substitute for loans from shylock or merchant cash advance.
How it works
With revenue based financing, the monthly payment lowers or rises based on the revenues. In a very good month for the business the mount to be repaid goes higher, and on a bad month, the repayment amount goes down. If there is a spontaneous growth in the business, the general repayment period is shortened. The investors enjoy good returns the quicker the business repays the loan in full.
The target businesses
This type of financing is appropriate to business with higher gross margins or when companies project a higher growth in their gross margins. The business that project growth and thus would like to add human resource can resort to this form of financing to execute the transition process. The company can hire additional salespeople to expand the clientele base.
Another instance is when a business wants to launch a new product; financial injection is appropriate in evaluating the product, do market research as well as analyze competition for the product. When identifying the market finance is involved, and thus such financing is core in developing marketing strategy, starting promotions early enough and for pre-launch trials of the products
Companies that want to initiate large-scale and intense marketing campaigns to boost a variety of products can resort to emergency loans. It’s also appropriate for those entrepreneurs who don’t want to personally take liability when guaranteeing a loan. These business owners will take the loan in the name of the company.
Unlike the normal loan facility like asset financing, there is no interest or penalty if the monthly fixed amount of installment is not made in time. Here the installment is dependent on the performance of the business in the particular month. Pegging installment to business performance also encourages the owner to quickly clear the loan in cases where the business experiences spontaneous growth.
The owner still has authority over the business. The entrepreneur can change the target market of the business in the quest to maximize profits. The sense of control and ownership is not denied.
The final amount of money to be repaid is clearly agreed by both parties from the onset. There are no hidden interests or penalties that will accrue in the process of repayment. It’s also flexible since it’s easy to access and pay without businesses risking their assets or exchanging any stake in the business with the financial injection.
RBF is a very core pillar in the development of small and medium scale businesses, but before opting for such financing, the owners should analyze the company’s revenue stream, market control, debt, cash flow and finally the operating expenditures and project the business growth.