Published on September 14th, 2015 | by Millennium Magazine Staff0
How Revenue Based Financing Helps Bank-Blocked Business Owners
According to the latest US Bureau of Labor and Statistics research, there are approximately 28 million small businesses in the United States. At some point, every small business needs extra funding. Did you know one in three small business owners borrow money from family and friends, while 75 percent of funding comes from bank loans and credit according to Bolt Insurance? Business loans come in many forms, so it’s likely that you’ll be able to find financing that fits your needs but they also have a certain downside; it is hard to qualify.
One of the most important, if not the most important factors for qualifying for a traditional business loan is ensuring you have impeccable credit. Your credit score is an overview of your credit risk which banks use to assess whether or not to extend credit and if so, at what interest rate.
Today, banks simply are not willing to take a risk if you have less than perfect credit. They use credit scores such as FICO® to predict the likelihood of your business defaulting on abusiness loan. The fact is banks believe that credit scores — i.e. past financial behavior — are a good indication of an individual’s future financial behavior. Whether or not you agree with that statement, the negative effects make it extremely frustrating for business owners to get a traditional business loan.
That being said, business owners with challenged credit need to approach their search for a loan differently. By looking beyond banks and considering nontraditional lenders, businesses are able to attain a loan that might normally be outside their reach.
One approach to helping bank-blocked business owners is revenue based financing. This program fills an important hole in small business funding. Unlike traditional lending, revenue based financing requires no collateral or perfect credit ratings to qualify. Instead lenders assess your company’s bank deposit history to determine eligibility and loan amount.
This type of alternative financing is designed for a business that generates revenue, but despite positive cash flow, still can’t get a bank loan because of a poor credit rating and/or lack of collateral. Also known as cash flow based lending, the loan program has been around since the 1900s, but until recently, was mostly used only in the oil and gas industries.
Repayment is based on your business bank deposits, with a fixed percentage deducted from your account on a monthly basis. Basically, it allows a business to pay off a loan based on a monthly allocation of the revenue the business brings in. While interest rates are higher than a traditional loan, some business owners accept the riskier lending format because it enables them to retain ownership of their businesses while not requiring them to pledge collateral.
While revenue based financing provides a viable alternative to traditional lending, it isn’t for everyone. According to Bloomberg, for businesses with low profit margins, revenue based financing isn’t ideal, as the fixed monthly percentage will further impede on your finances. Additionally, given revenue based financing relies on a fixed monthly percentage; businesses can end up paying a lot for the loan over time.
If a business owner is in need of financing to grow their business, but doesn’t have the credit score or collateral to secure a bank loan, there are many alternative funding options such as revenue based financing that one should consider. As with any loan agreement be sure to ask for complete transparency of fees, interest, and penalties that can be assessed to the loan in the event of default.