Venture capital and investments in start-ups are higher than ever before. In recent years, they have exceeded $600 billion per annum. Year over year, that marks around 92% of growth.
There’s a lot of money to go around for organizations in search of business financing. In the majority of cases, a business can obtain a lump sum of funding before they open their doors. There exists, however, another option: business funding based on revenue.
It’s not the right option for everyone, but it’s a great alternative for some. Read on as we discuss this uncommon type of business financing. You’ll learn what it does and what requirements you should meet to get it.
What Is Business Funding Based on Revenue?
Running a business is extremely costly, especially in the beginning stages. Obtaining business capital helps start-ups stay afloat until they reach profitability. Then, they can finally pay back their investors.
Many businesses have a mix of loans from financing institutions as well as venture capital from investors. They rely on services such as a merchandise credit line to keep things running. Expenses are tight as they approach self-sustaining revenue streams.
99% of the time, they get all that money in a single shot. It’s lucrative and tantalizing for fresh-faced business owners. But it presents a problem.
The Problem with Lump Sum Investments
It’s impossible to say how your business will perform years down the line. For all you know, you could be one of many businesses that go bankrupt. Then, your investors would descend like wolves to get their money back.
A lump sum investment is a risk because you have no idea if you’ll be able to pay it back. You might make a ton of revenue in the early years, but not enough to pay back investors. A relatively successful business–even if it doesn’t achieve its initial profit goals–could tank as a result.
How Business Funding Based on Revenue Solves This Problem
That’s where business funding based on revenue comes in. You only get funding according to your revenue. If you have a windfall year, your funding adjusts to it commensurately.
Conversely, if you have a bad year, you won’t be forced to pay back a now-impossible loan. There’s a much higher chance that you will bounce back for the subsequent year.
Granted, it’s not the most appetizing when compared to angel investments. Most businesses get dollar signs in their eyes when they see multi-million dollar investments for Silicon Valley start-ups. But for businesses who want a less-risky investment type, this is it.
How to Get Business Funding Based on Revenue
So you’ve talked to your business accounting department and liked the idea. How do you go about obtaining this type of financing? Let’s discuss.
Be a Growth-Stage Company
A growth-stage company is one in its infancy. One expected to experience considerable growth.
It’s easier to obtain this type of financing if you are the new kid on the street. Particularly, if you can show evidence of that growth. Your merchant financing will need to prove that you are on the up-and-up.
Be Launching a Brand-New Product
New products and product line-ups are a topic of feverish conversation in the business sphere. The stock market always perks up at the thought of future sales.
Take for example the new Apple Vision Pro. When Apple announced this new product, its stock increased significantly. The same tends to happen for any established company gearing up for a product release.
Be Preparing for a Massive New Marketing Campaign
If you can’t–or aren’t going to–release a new product, marketing is another option. Big marketing campaigns attract new investors and stimulate the customer base. For all intents and purposes, they have a very similar effect on a company’s stock as product releases.
They are also a signal to investors. Big marketing campaigns typically guarantee at least some increase in revenue. Depending on the size and scale of the campaign, it could mean years of secured gains.
Have an Established Market
Venture capitalists are typically looking for small companies with big dreams. Think Facebook or Amazon in the early aughts. They expect massive success at some point–not a milquetoast reception.
Many companies, however, don’t have those big dreams. They won’t ever see record-breaking profits. They do, however, see a consistent market return year over year.
Revenue-based financing excels in these markets, specifically. If there is consistent proof of success, it makes for a relatively risk-free investment.
Owners Disinterested in Selling Equity and Loans
Keeping with the theme of low-risk investing, consider your stance on loans and equity. Do you want to take out big loans, or sell equity to boost profits? If the answer is no, then revenue-based funding is probably for you.
Equity refers to a business’s value (worth of its assets) minus liabilities. Businesses will often sell equity, which means selling shares. This gives investors a controlling stake in the company.
When you have sold stake, you are beholden to your investors. The same goes for taking out a big loan–you’re beholden to banks. For venture capitalists, this is not usually an attractive proposition.
If you plan to remain private and not sell stake, consider revenue-based funding.
Fund Your Business Today
Business funding based on revenue is an alternative to large-sum investments for start-ups. Rather than receiving a massive angel investment, you get funding based on quarterly or yearly revenue. It’s lower-risk, consistent funding for established businesses with a solid customer base.
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