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Revenue-Based Loans

Revenue-based loans (RBLs) are extended based on a company’s historical and expected revenue. They are good for companies that do not have many assets or whose assets have been pledged to other lenders.
  • Revenue-based lenders would still file a lien on any unencumbered current and future assets
  • The cost of these loans depends on many factors, including market conditions
  • RBLs are not necessarily more expensive than bank loans

What are revenue-based loans?

Revenue-based loans (RBLs) are extended almost solely on the basis of historical and expected revenue. They are a good funding option for companies lacking assets or whose assets are already pledged to another lender.

These loans are different from factoring. The latter is a sale of outstanding receivables to a factoring company, (a third-party financing company like Business Factors or a bank. Revenue-based factoring is a misnomer that conflates the terms “factoring” and “revenue-based loans.”

Revenue-based loans can be repaid using a percentage of future revenue paid on a regular basis or through a fixed payment not linked to the revenue stream.

The proceeds from a loan or a factoring arrangement can be used for working capital, an asset acquisition or an inventory purchase, among other things. Lenders will always want to know what the loan is for while factoring companies do not usually ask about the use of proceeds.

Commercial loans, including revenue-based loans, are likely to come with some sort of collateral filing, depending on the lender and the type of loan. This could mean a blanket UCC lien in the U.S. or a PTSA/GSA filing in Canada. A blanket lien gives the lender the right to seize all present and future assets of the company until it is released. That lien would not encumber assets pledged to another lender.

Revenue-based loans, just like other commercial loans, are likely to come with a blanket lien on any unencumbered present or future assets. This could take the form of a UCC lien in the U.S. or a PTSA/GSA filing in Canada.

How do revenue-based loans work?

To determine the size of the loan, lenders take into account a company’s historical and expected revenue.

Let’s take a look at an example:

  • Last year’s revenue: $900,000
  • Revenue the year before: $800,000
  • Current monthly income: between $50,000 and $150,000

In this case, the lender may offer a loan based on a percentage of the company’s revenue. It could look like this:

  • Loan size: $80,000
  • Factor rate: 1.5x
  • Revenue percentage: 5% of monthly income

The total amount that needs to be repaid in the scenario above is $120,000 (Factor rate*1.5x). The lender will keep taking a percentage of a business’s monthly revenue until that repayment cap is reached. A repayment schedule could be as follows:

Time period Monthly income Payment Amount outstanding
January $60,000 $3,000 $117,000
February $90,000 $4,500 $112,500
March $100,000 $5,000 $107,500

As you can see, the monthly payment will fluctuate based on income earned each month. The more the business makes, the faster it will repay the loan. There is no fixed loan term.

Alternatively, the lender may just charge interest while the loan is outstanding. When the loan is due, it will be repaid in full.

  • Size of loan: $80,000
  • Interest rate: 10%, semi-annually
  • Loan term: 3 year

The business would pay $8,000 per year ($4,000 every six months) in interest, or $24,000 over the life of the loan. When the loan matures, the borrower would repay the original amount borrowed, which is $80,000.

A loan may also be structured so that it is amortized (repaid) periodically during its life.

Let’s take a look at a final example:

  • Loan size: $80,000
  • Interest rate: 10%, paid semi-annually in January and June
  • Loan term: 3 years
  • Amortization: 5%, paid semi-annually in January and June

The repayment schedule in this instance would appear as follows:

Time period Interest payment Amortization Principal outstanding
Year 1 January $4,000 $2,000 $78,000
June $3,900 $1,950 $76,050
Year 2 January $3,803 $1,901 $74,149
June $3,707 $1,854 $72,295
Year 3 January $3,615 $3,615 $70,448
June $3,524 $1,762 $68,725

The loan balance, as well as the interest paid, decreases as the loan is amortized. At the end of Year 3, the business would need to repay $68,725.

Revenue-based loans (and loans in general) can be structured in many different ways, depending on the lender, market trends, the industry and the financial situation of the borrower. To find the best loan for your business, please contact Business Factors & Finance.

Revenue-based loans are not necessarily more expensive than bank loans and can be cheaper depending on the lender, loan structure, borrower’s industry and financial situation.

Who should consider taking out a revenue-based loan?

Revenue-based loans can be a good option in the following cases:

  • Few hard assets, such as in the technology or service industries
  • “Complicated” receivables, such as those involving contingent or progress billing or pledged to another lender or factor
  • Inventory that is difficult to use as collateral
  • Assets have liens attached to them
  • Steady incoming cash flow

How to qualify

Eligibility requirements vary among lenders. In general, lenders could look for the following:

    • At least one year in business
  • A minimum of $100,000 of EBITDA
  • Strong historical revenue
  • Steady incoming cash flow

Businesses should be prepared to provide proof of income, such as bank statements, invoices and other documents. Time-to-funding varies by lender, but could be as fast as 1 to 3 business days.

Business owners should avoid revenue-based loans with daily or weekly withdrawals, as well as those with hidden fees or an excessively long list of default clauses and. The former may be hard to keep track of, while arbitrary default clauses may put the business at risk of losing its assets without due process.

Business Factors does not dabble in this sort of loan products and offers transparent terms, custom-tailored to your business. Contact one of our consultants today.

Businesses should be careful to avoid revenue-based loans with daily or weekly withdrawals and an excessively long list of default clauses. These may be hard to keep track of and put your business at risk of losing its assets without due process.”

Are revenue-based loans more expensive than traditional bank loans?

Conventional wisdom used to suggest that certain types of loans cost more than others. Thanks to the use of technology, the financial industry has evolved to offer more borrowing options than ever before. This means that revenue-based loans can be cheaper or more expensive depending on the borrower’s circumstances, the lender it is working with and market conditions. Qualifying for traditional bank loans can be more difficult and may take longer to get approved– resulting in the delayed receipt of much-needed funds.

To find the best financing option for your business, please contact Business Factors.

Conclusion

Revenue-based loans are commercial loans based on a business’s historic and expected revenue. The loans’ structure depends on the lender, the borrower’s particular circumstances and market trends. They can be repaid using a percentage of the business’s monthly revenue or with a fixed payment. Revenue-based loans can be good for businesses with “complicated” receivables. Therefore, this type of loan may be beneficial for businesses that:

  • Have contingent or progress billing
  • Already pledged assets to other lenders
  • Have inventory that is hard to lend against (e.g. perishable goods)

Lenders will generally look for businesses that are at least a year old; exhibit strong historic revenue trends and have a steady cash flow. Thanks to financial innovation, revenue-based loans are comparable in price to bank loans. Please contact Business Factors & Finance to see if a revenue-based loan is right for your business.

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