What is a Revenue Based Loan?
Within the last five years the alternative lending arena added a new type of funding product. Revenue based loans are a type of loan that bases the amount you can borrow on the revenues your business generates each month. It is a short term relatively expensive loan that ranges between 19% and 48% cost. They are repaid via daily electronic payments debited directly from a business owner’s bank account each weekday.
An example of a revenue based loan is a working capital advance or merchant cash advance.
Expectations of Revenue Based Loans
As a small business owner applying for a revenue based loan you should understand what you can qualify for. If your business is generating only say $20,000 per month you should not expect to be approved for $150,000.
Alternative lenders will base their approval amounts on either a percentage monthly revenue or percentage of yearly revenue. As a starting point expect approval amounts of between 30% and 125% of monthly revenues or 6% to 20% of gross yearly revenues. Alternative lenders have extensive experience and data that tell them what to lend.
Additional factors that affect the loan amounts are personal credit, business credit, time in business, industry and seasonality.
How Revenue Based Loans Work
First of all the application process is extremely fast. A one page application, 3 months of bank statements, 4 months of credit card processing statements (not required to receive funding), a lease, voided check, and driver’s license is all that is required to receive a lending decision in just 24-48 hours.
The rates or cost of the money will range between 19% to 48%. The repayment term is short; 3 to 12 months on average. Sometimes a term can be longer but that is very rare.
These revenue based loans are repaid each weekday. A fixed amount will be deducted from your bank account Monday through Friday until the loan is repaid.
Once you accept an offer the lender will verify your banking details and verify with your landlord that your lease is in good standing. From that point you will be funded. All in all from application to funding is less than 7-10 days.