Revenue based finance

Looking for flexible finance that moves with your business’ turnover? Revenue based finance does exactly this. Or you could use a Flexi-Loan instead.

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  • From £1,000 to £500,000
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What is revenue based financing? 

Revenue based finance is a type of business lending that sees you sacrifice a percentage of your future turnover for cash in the bank upfront. 

You’ll usually pay back your loan in monthly instalments and each month’s amount will be directly tied to the success of your business. So, if your business is doing well and growing fast, your repayments will be higher and you’ll pay off your loan faster. If business is slow, instalments will be smaller and your loan term will last longer, but won’t take as big a chunk from your turnover.

And, applying for revenue based finance tends to be a lot simpler, with lenders requiring a lot less information from you directly. Instead of filling out endless forms and paperwork, you’ll usually just be asked to connect your business bank account via open banking.

How does revenue based financing work? 

Say you run a cafe and want to borrow £20,000 to buy a few more coffee machines. Your revenue-based finance lender will take a look at your turnover and determine whether they’re comfortable offering you a loan of that size.

Once that’s settled, it’s time to agree what percentage of your turnover you should pay back each month – for this example, let’s say it’s 5%. That means that if in your first month you make £50,000, you’ll owe your lender £2,500. If your next month is slower and you only turnover £40,000, your monthly repayment will also reduce to £2,000. 

With this form of business finance, the success of your business determines how much you’ll pay each month and how long your loan term will be.

Because we’re designed specifically for small businesses, our business loans work like you do: they’re fast and hassle-free.

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What types of revenue based finance exist? 

Revenue based finance is a type of business lending that sees you sacrifice a percentage of your future turnover for cash in the bank upfront. 

You’ll usually pay back your loan in monthly instalments and each month’s amount will be directly tied to the success of your business. So, if your business is doing well and growing fast, your repayments will be higher and you’ll pay off your loan faster. If business is slow, instalments will be smaller and your loan term will last longer, but won’t take as big a chunk from your turnover.

And, applying for revenue based finance tends to be a lot simpler, with lenders requiring a lot less information from you directly. Instead of filling out endless forms and paperwork, you’ll usually just be asked to connect your business bank account via open banking.

There’s two core types of revenue-based finance – variable collection and flat fee. But how do they work? 

Variable collection 

This form of revenue-based finance is the same as the example above. You borrow an amount of money and pay it back in monthly installments tied to your gross profits. The success of your business determines the length of your loan term. 

Flat fee

Flat fee revenue-based finance is a little different and a little less common. Usually, you’ll pay back your loan at a much lower interest rate, but the term of your loan will be fixed for a longer period. These lower monthly repayments can be attractive to younger startups, but could mean you pay much more if your turnover skyrockets early on.

Is revenue-based financing right for your business?

Technically, any type of business can apply for revenue-based finance. But some businesses will be particularly drawn to it because of their business type or business model.

Seasonal businesses 

Not all businesses make the same amount of money all year round – some have busy periods that keep them running when things are quieter.

Traditional forms of business finance could see seasonal businesses struggling to repay their loans during these quieter periods, or having to be extra careful with budgeting to make sure they have enough cash in the bank to see quiet spells through. 

Because businesses taking revenue based finance only pay an agreed percentage of their turnover each month, it’s well suited to ones that don’t have consistent revenue streams all year round. 

Startups & younger businesses

If you run a startup with a promising future, but lack trading history for traditional business finance then you’re likely to be drawn to revenue based finance. This form of business finance allows you to get the cash you need upfront, while only having to repay at a rate that’s proportional to your growth. If your business is slower than expected, you won’t be left struggling to repay your monthly installments. 

Subscription-based business 

Subscription-based businesses tend to have steady and predictable streams of income, making it easier to work out how much they can afford to repay each month. Because of this, revenue based finance could be a good way of raising capital, with the comfort of knowing your repayments will decrease if business slows up. 

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How to get a Flexi-Loan

  1. Apply in minutes

    It takes five minutes from start to finish. We're designed with small businesses in mind, so we'll just need the basics about your business to make a decision.

  2. Use your funds

    We'll approve you based on your business performance. You then transfer as much as you need to your bank account, and the funds will typically be in your account in hours.

  3. Repay or top up

    We don't charge early repayment fees: we only charge interest for the days you have the money. If you need more funds, applying for a top up is easy. As your business grows your credit limit will too.

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What are the pros and cons of revenue-based finance? 

Advantages of revenue based finance 

Opting for this type of business finance will mean you stay in control, as you won’t have to sacrifice equity for capital. You’ll also benefit from flexible loan terms that move as you do, meaning you’ll only pay back the same percentage regardless of your success. If your business does well early on, you could end up with a very short loan term and growth that wouldn’t have been possible without an upfront injection of capital. Younger businesses should find it easier to secure this type of finance and many lenders offer quick and easy application processes.

Disadvantages of revenue based finance

There are a few downsides of revenue based finance that you should be aware of before applying. You’ll usually be restricted in the amount you can borrow, especially if your business lacks trading history. And, your company will need to be actively making revenue for a lender to offer you the finance you’re looking for – if you’re still in a testing phase and are yet to roll out your product on a mass scale then you may need to look for another type of business finance. Finally, revenue based finance best suits shorter loan terms, meaning you won’t be able to use this option if you’re looking to borrow for a longer period of time.

Revenue based finance vs business loan

Revenue-based finance can be an attractive way to borrow for your business. But, it might not be the right option if you’re looking to take a larger amount of money. 

If your business has a relatively steady income all year round and has more trading history, you could try applying for a business loan instead. Borrow up to £500,000 with our Flexi-Loan and repay over two years. If you want to repay early – we won’t charge you extra.

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Revenue based finance FAQs

There are a lot of options out there when it comes to business finance. Here are some of the common questions we get asked

Why use revenue-based financing instead of debt financing?
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So you're considering financing options? Let me help you understand why you might choose revenue-based financing (RBF) over traditional debt financing.

  1. Flexibility: The main advantage of RBF is that it's super flexible. You pay back a percentage of your revenue, so if you have a slow month, your payment will be smaller. This is great because it takes off some of the financial pressure during tough times. Traditional loans, on the other hand, have fixed monthly payments regardless of how well your business is doing.
  2. No collateral needed: With RBF, you don't need to put up any collateral (like your house or other assets) to secure the financing. Traditional loans often require collateral, which can be pretty risky if things don't go as planned.
  3. No personal guarantees: RBF usually doesn't require personal guarantees, which means that your personal assets are safe even if your business can't repay the funding. With traditional loans, you might need to provide personal guarantees, and that can put your personal assets at risk.
  4. No dilution of ownership: Unlike equity financing, RBF allows you to keep 100% ownership and control of your business. You're not giving away any shares or decision-making power to investors. Debt financing doesn't dilute ownership either, but RBF's flexibility can make it more appealing.
  5. Growth-focused: RBF is well-suited for businesses with high growth potential, as the payments adjust to your performance. Traditional debt financing can sometimes be restrictive and limit your ability to invest in growth opportunities.

However, keep in mind that RBF can be more expensive in the long run compared to traditional loans, and you need a proven revenue track record to qualify. But if you're looking for a flexible, non-dilutive financing option that can help you grow without the pressure of fixed monthly payments, RBF might be a great choice for your small business.

What are the fees associated with revenue-based financing?
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The fees can vary depending on the funding provider and the specific terms of your agreement, but here are some common fees you might encounter:

  1. Origination fee: This is a one-time fee that some funding providers charge to cover the costs of processing your application and setting up the financing. It's usually a percentage of the total funding amount, typically ranging between 1% to 5%.
  2. Due diligence fee: In some cases, the funding provider might charge a fee for conducting their due diligence, like evaluating your financials and assessing the risks involved. This fee could be a flat rate or a percentage of the funding amount.
  3. Early repayment fees: Some funding providers may charge a fee if you decide to pay off the entire amount earlier than expected. This could be a flat fee or a percentage of the outstanding balance.
  4. Late fees: If you miss a payment or don't pay the full agreed-upon percentage of your revenue, you might be charged a late fee. This could be a flat fee or a percentage of the missed payment amount.

It's important to carefully review your RBF agreement and ask the funding provider about any fees you don't understand. Also, don't be afraid to negotiate! Some fees might be negotiable, and you can potentially save some money by discussing the terms with the funding provider.

Just remember, while RBF can be a great flexible financing option for small businesses, the fees and overall cost can be higher than traditional debt financing. So, make sure to weigh the pros and cons before deciding if it's the right fit for your business.

What is the difference between venture debt and revenue-based financing?
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Here's a breakdown of the differences between venture debt and revenue-based financing (RBF).

  1. Repayment structure: The biggest difference is how you pay back the funds. With RBF, you pay back a percentage of your monthly revenue until you hit a predetermined repayment cap. This means your payments are flexible, adjusting based on your revenue each month. Venture debt, on the other hand, is a fixed-term loan with regular principal and interest payments, similar to traditional debt financing.
  2. Eligibility: RBF typically works best for businesses with a strong revenue track record, as you need to show that you can generate enough revenue to pay back the financing. Venture debt is often used by startups and growth-stage companies that have received venture capital (VC) funding but need additional capital without further diluting their equity. So, if you've already raised VC funding, venture debt might be a better option for you.
  3. Collateral and personal guarantees: Venture debt often requires collateral (like company assets) to secure the loan, and sometimes even personal guarantees from the founders. This can be risky if things don't go as planned. RBF, on the other hand, usually doesn't require collateral or personal guarantees, which can be less risky for you as a business owner.
  4. Use of funds: RBF is generally more flexible in terms of how you can use the funds, making it suitable for various business needs like expansion, marketing, or working capital. Venture debt is often used for specific growth initiatives or as a bridge to the next equity financing round.
  5. Cost: RBF can be more expensive in the long run compared to traditional loans, but it's often less expensive than equity financing. Venture debt is typically cheaper than RBF but can still be more expensive than traditional loans due to the higher risk associated with startups and growth-stage companies.

Both options have their pros and cons, so it's essential to carefully consider your business's unique needs and growth plans before deciding which financing option is the best fit for you. Finally, just so you know, we've written a piece on venture capital that could of use.

The iwoca story

Over the past eleven years iwoca has grown from an ambitious fintech start-up to one of the fastest-growing and biggest business lenders in Europe. Now we're a team of around 400 in London, Leeds and Frankfurt working towards the goal of funding one million small businesses.

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Call us at 020 3397 3375 from Monday to Friday (9am - 6pm). We can take your business loan application over the phone, or answer your questions about applying online.

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