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Revenue-Based Financing vs. Debt Financing for Startups

Revenue-Based Financing vs. Debt Financing for Startups

Monday 19th April, 2021

Revenue-Based Financing vs. Debt Financing for Startups

Establishing a business can be intimidating but a rewarding process. While a well-strategized business plan is essential, financing is another critical aspect a company needs to succeed. Getting funds to finance a start-up or any small business is tricky — especially for those with bad credit scores. Fortunately, traditional lenders come in handy as an alternative if you are unable to get a business loan.

When it comes to start-up business financing, revenue-based and debt financing seem to dominate the industry. However, understanding how each of these financing options works, their advantages and disadvantages is imperative. Here is a comparison of revenue-based financing to debt financing for start-ups.

REVENUE-BASED FINANCING

Start-ups and small businesses may reach a point where capital influx is required to take the company to the next level. Besides debts and equity-based resources such as venture capital, Revenue-Based Financing (RBF) is another excellent option. Also referred to as royalty-based financing, RBF is the capital-raising method where investors agree to provide funding to the business.

However, the company has to offer a certain percentage of the existing total gross revenue to the investor. For instance, if you run a small SaaS company and need $1 million as capital, considering revenue-based funding helps you get funds fast at low-interest rates. This financing option is an alternative investment method to conventional equity-based investments such as angel investing.

PROS OF REVENUE-BASED FINANCING

CONS OF REVENUE-BASED FINANCING

DEBT FINANCING

Primarily, start-ups and small businesses access capital from various sources to facilitate growth. Although most of them will use personal saving or other self-funding options, third-party borrowing — in this case, debt financing — has become common. Debt financing is a traditional lending method that offers companies capital in a variety of ways.

Debt financing involves businesses obtaining investment capital with the condition of repaying the principal amount plus interests within a specific timeframe. That is, repaying the total amount borrowed together with an agreeable interest rate. Debt financing is usually secured with collateral, where the lender uses it to recoup losses if the borrower defaults to pay back the loan.

PROS OF DEBT FINANCING

CONS OF DEBT FINANCING

REVENUE-BASED FINANCING VS DEBT FINANCING: WHICH IS RIGHT FOR YOU?

Both revenue-based financing and debt financing can help you get the capital you need for your business. However, RBF seems to become ideal more for start-ups and small businesses. This is because they require no collateral, and repayments favour growing companies. On the other hand, debt financing accompanies exciting benefits that can attract business owners.

Which financing option you choose to obtain capital depends on your company goals and other factors. If you need a robust financing option to build your brand and avoid financial difficulties, we here at Betterbanc are always ready to help you. Contact us today to find out more!

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