It can be challenging to understand the different terms for financing options. Two options that are often compared is revenue-based funding versus term loan. Both are excellent ways to fund your business, but each has different ways to pay back loaned capital. We’ll dive in a little about both and what to consider when choosing the best option for your business.
Revenue-Based Funding Vs. Term Loan
When you’re a small business, you want to hold onto as much equity of your company as possible. Revenue-Based Funding is the perfect way to have cash injected into your business without compromising equity, or at least avoiding giving up a large equity share. Revenue-based funding similar to a royalty model, with a percentage based on sales, set until the loaned amount is paid back, usually with a slight additional interest.
A term loan is practically like a traditional loan; a lump sum of an agreed amount and terms to pay back, usually with a percentage of interest. Term loans are great options for your business if you need an injection of money in one large amount.
Unlike the RBF option, your interest rate is agreed on from the start. So you wouldn’t expect to pay different amounts.
Should I Choose Revenue-Based Funding or Term Loan?
It all depends where you financially stand with your business and your sales. If you’re brand new and slowly gaining revenue, a term loan would be your best option. Although RBF only takes a percentage out from sales, the constant change in amount owed can be stifling for a business trying to get started. At the beginning of a start-up, money is usually tight and having a solid budget will help you succeed.
Now, if your business is booming and you have (have had) a consistent stream of revenue, RBF would be your best option. You want to pay off any debt as soon as possible and since revenue-based funding takes a percentage of sales and the likelihood of paying it off quickly is much higher than a term loan; which is ultimately better for your business. Plus, if you have a consistent revenue stream, you might be able to receive a better percentage rate since you’ll be able to pay it back faster. You want to try to pay off any debt as quickly as possible to grow.
