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When you are starting out on a new business venture, you will need to invest capital to finance the start-up costs involved. Depending on the scope of your project, you may require a significant cash injection to get the ball rolling. And without savings to invest, you will need to consider a new business loan to cover start-up costs. However, there are restrictions on borrowing funds that may make this unrealistic or problematic for a new business.
Similarly, if you are an established business requiring funds to facilitate expansion, or you need additional capital to make improvements or upgrades, applying for a small business loan may be useful. But again, this type of loan comes with stipulations that may limit your ability to secure the funds.
To explain, traditional debt financing requires you to offer up collateral to back your new or small business loan. You will also need to adhere to a strict repayment schedule to satisfy the bank’s requirements. This may not be an ideal situation when you are just starting out.
Thankfully there is a simpler, more flexible option available that makes borrowing for new or small businesses more attainable: revenue-based financing. Following is a complete guide to revenue-based financing and how it can help your business succeed.
What is revenue-based financing?
A relatively little-known, but innovative way to borrow funds for your business is revenue-based financing. This model of loan is to offer financing that you pay back by dedicating a percentage of your gross profits to reducing your outstanding loan balance.
So, unlike a traditional bank loan, your repayments and loan term will fluctuate depending on how much profit you make. Additionally, and importantly, you are not required to provide collateral (up to a certain amount), meaning you won’t be risking your business, home, or other assets.
These loans are unique and offered based on the projected income of your business (or current financial data if your business is already established). Through careful analysis, your loan will be personalised to suit your business needs and your repayment capabilities based on your financial position.
Revenue-based financing offers great funding opportunities for small businesses looking to expand. Without jeopardising your current situation, you can confidently invest in the future growth of your business.
How does revenue-based financing work?
As outlined above, loans are granted on the basis that your repayments will be calculated as a percentage of your profit. For example, if you borrow $20,000 your loan contract might state that you need to pay 10% of your profits until the total loan amount is paid off:
So, in month one of your loan, your business revenue might be $40,000, which means you will pay back $4,000.
The next month, your revenue might be $32,000 therefore you will be required to pay $3,200.
In short, when your profit is higher you pay more off your loan. Additionally, profits determine the length of the loan term, with higher profits decreasing the length of the payback period.
Furthermore, there will be no ugly surprises or unexpected payment requirements with revenue-based financing. Your loan contract outlines the specific parameters of the loan including the amount to be provided, the total repayment amount, the percentage of profit to be repaid, and the payment frequency. As a result, you can plan your budget efficiently and effectively knowing exactly how your repayments will work. And above all, you will never be forced to pay more than your business can afford.
Benefits of revenue-based financing
Revenue-based financing provides opportunities that traditional business loans may not. Consequently, this type of loan is particularly advantageous to new and small businesses looking for start-up capital or additional investment funding. When reviewing your financing options, you should consider the significant benefits of a revenue-based loan:
1. Less risky
Traditional business loans require collateral, such as the business or your home. Revenue-based financing does not require collateral (up to a certain amount) therefore your risk is mitigated.
2. Repayments linked to performance
With a percentage-based repayment model, when your business is doing well, your repayments will be higher. If sales are down, you won’t pay as much off your loan. You are not locked into a repayment schedule.
3. Flexible loan terms
Revenue-based financing offers more flexible payment terms than a traditional loan. Short or long, you can select a loan term that suits your estimated income and budgeting requirements.
4. Simple application
Revenue-based loans require considerably less paperwork than other business loans, usually no more than a one-page application along with your financial data. So, you won’t be bogged down with pages and pages of documents to complete.
5. Fast funding
Your loan application is processed almost immediately and the money will be in your account within a day or two if you are eligible. This means you can get on with the task of growing your business.
Introducing Square Loans
Renowned globally as a leader in innovation and small business solutions, Square is now offering Australians revenue-based financing to help their business thrive. Square Loans offer customised business loans that work with your cash flow. With no ongoing interest, and just one simple loan fee (determined by the size of your loan), you can get the capital you need to get your business up and running, or realise your expansion dreams, fast. And best of all, for loans under $75,000 Square does not require personal collateral, meaning your business, home or car are not placed at risk.
With Square Loans you pay back what you can afford based on your daily sales. This means that on slow days, you will pay back less; and when sales are strong you will contribute a little more. Additionally, you are not locked into a payment schedule, you just need to meet your minimum payment every 60 days.
Square Loans offer a simple application process, immediate approval, and a fast payout. Above all, applying through Square Loans will not affect your credit rating.
It has never been easier to start your new business venture or take your small business to the next level with Square Loans. Finance your goals with a flexible loan that is designed to move with you.