Revenue-based capital is a form of financing where a business borrows money from a lender in exchange for a percentage of its future revenue. This type of financing is becoming increasingly popular among startups and small businesses because it does not require collateral, has flexible repayment terms, and does not dilute ownership.
With revenue-based capital, businesses repay the loan based on a percentage of their future revenue. This means that if the business has a slow month or quarter, the repayment amount will be lower. Conversely, if the business has a strong month or quarter, the repayment amount will be higher. The repayment period is typically between 12 and 36 months, depending on the lender.
The benefits of revenue-based capital include:
- No collateral required: Because the loan is based on future revenue, there is no need for collateral, making it a good option for startups and small businesses that may not have significant assets to use as collateral.
- Flexible repayment terms: The repayment amount is based on a percentage of future revenue, making it a flexible repayment option that can adjust to the ups and downs of a business.
- No dilution of ownership: Because revenue-based capital is not equity financing, the business owner does not have to give up any ownership in the company.
- Higher interest rates: Because revenue-based capital does not require collateral, it is considered a higher-risk financing option, which means that interest rates can be higher than traditional loans.
- Repayment terms: Because the repayment amount is based on a percentage of future revenue, it can be challenging to predict cash flow and budget for loan payments.
A line of credit is a type of financing that allows a business to borrow money up to a predetermined limit. The business can draw on the line of credit as needed, and interest is only charged on the amount borrowed. Lines of credit can be secured or unsecured, and the interest rates are typically lower than other forms of financing.
The benefits of lines of credit include:
- Flexibility: A line of credit provides flexibility for a business to borrow the amount needed when it is needed.
- Lower interest rates: Lines of credit typically have lower interest rates than other forms of financing.
- Building credit: Consistent and responsible use of a line of credit can help build a business's credit score, making it easier to secure financing in the future.
- Approval can be difficult: Securing a line of credit can be challenging, especially for startups or businesses with a limited operating history.
- Risk of overborrowing: Without proper financial planning, there is a risk of overborrowing, which can lead to financial trouble down the line.