Sometimes a small business runs into a financing wall where it seems there are no more options available, and without a cash infusion there is no way to move the business to the next level. A situation like this can cause real damage to a growing business. Without the funds required to buy equipment, hire staff or expand the business, the wheels stop turning and the business can grind to a halt.
However there just may very well be a proverbial light shining at the end of the tunnel! Before submitting to despair, take heart in the fact that there is a possible solution to this situation. An innovative new financing model, Revenue Based Financing, may be able to turn things back to the positive.
Revenue Based Financing (sometimes called Royalty Based Financing or RBF), is a unique financing option that could be the solution for many businesses in need of capital to fund growth. RBF offers a more flexible loan alternative by allowing businesses to borrow money using future revenues as collateral. The loan terms will vary, and usually the payment is a percentage of the gross income of the businesses revenues up to a certain capped amount. The RBF loan terms between the lender and the small business owner can vary a lot depending on many factors, but the investor and the business owner's interests are aligned: Increased revenues pay the loan back faster, and increased revenues help the business to grow.
In addition to offering a life line for many small businesses, RBF is an attractive option as a loan in itself, mostly because it is non-dilutive in nature. The investment is similar to a bank loan, in that no equity stake in the business is traded for the cash. This differs greatly from a standard equity (dilutive) financing, where the money is traded for an ownership stake in the business.
Considering this, RBF is often best suited for young and newly established businesses that have an existing customer base and a solid plan for growth, but are unable to move forward due to lack of funding. These businesses are often in the stage where the business is running at maximum capacity, but does not have the capital to invest in the infrastructure to grow further. This is the time when RBF should be considered as a practical funding source, offering key advantages over conventional forms of financing.