If you need financing to operate your business, revenue-based financing can be an attractive option with more lenient qualifications and restrictions than other forms of funding. However, because of the more lenient requirements, the cost of revenue-based financing can be more expensive than some other options. In this guide, we’ll explore the costs associated with revenue-based financing, what you can do to lower your financing costs, and the benefits that this unique type of financing offers.
Before detailing the average rates of revenue-based financing, it’s important to understand how this type of financing works.
Because it is not a traditional loan or other financing options, revenue-based financing does not have an interest rate attached to it.
However, you can do your own calculations to determine the rate of your financing by understanding the terms of your agreement. Additionally, you can use a simple revenue-based financing calculator that does the legwork for you.
In general, the rate on most revenue-based financing agreements tends to hover between 20% and 40%. However because this number is determined based on a multitude of factors, it can fluctuate enormously depending on your business and funder.
The factors that decide how much your financing cost can vary slightly from funder to funder but in general, funders will analyze some of the following:
Because revenue-based financing doesn’t have a strict interest rate, you’ll need to do some math to determine the cost of your financing. Here’s how.
First, you’ll need to analyze the terms of your proposal. This will detail the factor rate and the percentage of your monthly revenue that goes toward your financing. From there, you will need to predict your future revenue, as this will ultimately determine the amount you remit.
Here’s an example of how revenue-based financing could work for your business.
Let’s assume that your business has qualified for $100,000 in financing with a monthly revenue of $100,000 and your factor rate is 1.2x. In your proposal, you are responsible for remitting 10% of your monthly revenue towards your financing. In this scenario, your total remittance amount would equate to $120,000.
To calculate your APR, you’ll also need to consider the growth of your revenue. When assuming your revenue is flat, in this example, your APR would be 35.1%.
If your revenue increases, this could cause your APR to increase because you’ll be remitting back a larger amount in a shorter time frame. Conversely, if your revenue decreases, your APR may decrease because of the lower monthly remittance.
Your factor rate plays a pivotal role in determining the interest rate of your financing. If you can secure financing with a lower factor rate, your APR will be more favorable. The same applies to the percentage of revenue that you must remit each month. The lower the percentage, the lower your APR will be.
By examining these numbers, to get the best terms possible and keep your APR low, you should look for terms with a low factor rate and a smaller remittance percentage. However, don’t let the cost get in the way of your financial goals. If you believe it is a wise form of financing that will help your business grow and exceed your revenue targets, revenue-based financing could be a great option.
If you want to reduce the cost of your financing, there are several things you can do to get the best terms possible and save money.
While many funders do not offer early fulfillment discounts, there are a few that can drastically reduce the cost of your financing, including Specialty Capital. This is perfect for businesses that are seeking funding to resolve short-term cash flow obstacles such as bridging accounts receivable gaps or dealing with short-term seasonality.
The amount you can save will depend on the funder and your business circumstances, but it can be substantial in some cases
While this isn’t possible for every business, preparing for financing months ahead of time can be a great way to reduce the cost of your finances. You’ll want to aim to improve your revenue and bottom line as much as possible within 6 months of submitting your application for financing.
Additionally, showing signs of revenue growth can be a great way to secure favorable terms for your financing.
If you don’t require a large lump sum amount, consider looking for a funder that offers multi-draw advances. These work similarly to a line of credit or other revolving credit options where you only remit a percentage on the amount drawn, rather than the entire amount. Then, as you remit your financing, the amount of capital you can draw from is replenished. Multi-draw advances offer superior flexibility and can help to keep your financing costs down which can be great for businesses that need a flexible amount of financing.
Because revenue-based financing is not a loan and doesn’t have the same regulatory guidelines that loans have, there’s more flexibility in the approval process. This means that some funders are willing to negotiate on the terms offered in your agreement. If you can show signs of a strong footing, there’s a chance your funder will work with you and offer more advantageous terms.
As with any type of financing, be sure to shop around to see what financiers can offer. You may be surprised how much costs and terms can vary from funder to funder, so be sure to spend time analyzing your options to find the best terms possible. By securing a lower factor rate or a smaller percentage of revenue paid towards your financing, can lower the total cost of your funding.
If you’re unable to decrease the costs of revenue-based financing, you can consider other traditional funding options like a bank loan, line of credit, or even a business credit card. Each of these has its own pros and cons that you’ll need to weigh – but in some cases, they can be more affordable if you meet the qualifications and requirements that they need. You can explore our revenue-based financing vs business loans and revenue-based financing vs lines of credit for more help deciding which type of financing is best for your business.
Revenue-based financing is a great option for businesses that lack the credit to qualify for other types of financing, but the benefits extend further.
In some cases, if your business has strong, stable recurring revenue, the cost of your financing can be less expensive than traditional financing options. By taking advantage of early remittance discounts and utilizing multi-draw advances – this can reduce the total cost of your financing setting your business up for future success.
Additionally, if you need capital quickly, revenue-based financing could be a viable option. Because there’s no need for any asset appraisals to back your financing, the funder will need to vet your business and financials to qualify and approve you for financing.
If you’re ready to learn more about revenue-based financing to see if it’s a strong solution for your business, get in touch with Specialty Capital today and let our team of experts guide you through the process.
While there is no set interest rate for revenue-based financing, in general, it ranges between 20% and 40% for most standard borrowers. There are many factors that make up the APR on your financing including your business’s revenue, credibility, and the funder you work with.
To save money on your financing, be sure to shop around and look for funders that offer early fulfillment discounts or other offerings that more your financing more flexible. Because funders have more leeway and aren’t under the same regulatory scrutiny as traditional loans and financing, can also try to negotiate the rates and terms to make it more affordable.
If you’re unsure about which type of financing is best for your business, contact Specialty Capital today to see which best suits your business.
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