When it comes to fundraising, most people hear the term ‘funding’ and believe that’s the only option they have. And because the alternative small business lenders are also using the term, many people don’t consider financing as a viable option to accessing capital.
What is Financing?
Financing is the process of raising money for different activities, like starting a business, making a purchase, or investing. You can raise cash by borrowing it (debt financing) from financial institutions or by bringing in shareholders or partners.
The overlap between funding and financing is that both are financial products. Small to medium-sized enterprises (SMEs) looking to access capital need to look at revenue-based financing.
In this article, we look at what revenue-based financing is, what are the benefits for SMEs and the application requirements.
What is Revenue-Based Financing?
The revenue-based financing (RBF) model provides upfront capital in exchange for a fixed percentage of monthly revenue until a pre-agreed repayment cap is reached. Payments fluctuate with revenue; equity and board control are typically unaffected.
Types of Revenue-Based Financing
Before applying for RBF, you need to understand the different types to pick the right one for your business.
- Traditional revenue-based financing: Provides a lump sum in advance; it requires repayment of the loan times a multiplier, with payments based on a percentage of sales.
- Subscription-based revenue financing: Repayments are based on recurring revenue.
- Revenue-trading platforms: Businesses sell future recurring revenue streams to investors.
- Accounts receivable financing: Also called invoice financing, it involves selling invoices at a percentage of their value to a factoring company.
- Merchant cash advance: Funded by payment processing companies; repayments are a percentage of payments processed.
- Hybrid revenue-based financing: Combines revenue-based financing with equity or debt-based financing.
Benefits of Revenue-Based Financing
Here are some of the benefits that come with RBF.
- Flexibility: Payments for RBF increase during busy sales periods and decrease during slower ones. This ensures SMEs are not overwhelmed by fixed payments.
- No collateral: Unlike traditional lending, RBF does not require any assets like property or equipment to qualify
- Quick approval: Traditional loans can sometimes take a long process. With RBF, applicants securing financing can receive the money within minutes.
- No credit score: RBF is quite inclusive because lenders won’t look at credit scores. All that matters is the business’s current revenue and future potential.
Who can Benefit from Revenue-Based Financing?
RBF is an ideal option for high-growth SMEs and existing businesses that are experiencing cash flow problems but still have high revenue, and borrowers who cannot qualify for traditional financing because of poor personal credit.
However, revenue-based loans rely on immediate revenue, so businesses without any income may not qualify for the financing.
Pros and Cons of Revenue-Based Financing
Much like other types of financing, there are advantages and disadvantages to RBF.
Advantages
- Retain full ownership of your business
- No personal guarantees required
- Loan repayments are flexible, reducing strain on cash flow
- High-growth businesses that choose the variable collection method can pay off the loan more quickly
- No interest payments
- Quick turnaround process
Disadvantages
- Revenue is essential – early-stage businesses without income do not qualify
- Small loan amounts
- Not suitable for long repayment terms
How to Qualify for Revenue-Based Financing
RBF is a type of unsecured loan because it requires no collateral. Here are the common qualifying requirements for RBF.
1. Proven Business Track record
Most lenders will require that your business have been trading for at least 6 to 12 months. This time demonstrates to the lender that your business has operational stability and consistent revenue.
2. Minimum Monthly Turnover
Typically, lenders require a minimum monthly turnover threshold, e.g. R20 000 to R100 000 per month, depending on the funder. A strong and consistent cash flow shows that you are able to repay the financing.
3. South African Business Bank Account
Having a registered South African business bank account is critical. Most lenders will request a 3 – 6 months bank statement to assess your cash flow.
4. Valid Business Documents
You need to have up-to-date documents, such as:
- CIPC company registration
- Valid South Africa ID for business owners
- Proof of business address (if applicable)
- Tax clearance certificate (if applicable)
5. Clean or Manageable Credit History
While unsecured funding providers are more flexible than banks, they still evaluate your credit history. Small issues will not disqualify you, but excessive defaults could raise concerns. In some cases, lenders may assist you in rebuilding your credit profile.
6. Clear Funding Purpose
You need to clearly explain what the funding will be used for. Whether it’s expanding stock, launching a new branch, or covering seasonal payroll, a defined purpose reassures lenders and shows you’ve thought it through.
Applying for Revenue-Based Financing
Apply for revenue-based financing by choosing fintech lenders like Lula or Bridgement for fast, online applications, or traditional banks for tailored options.
Steps for Application
Step 1: Select a Provider
There are various lenders available in South Africa that can provide your business with revenue-based financing. Consider the following:
- Fintech or alternative lenders
- Traditional banks
- Specialised funding programmes
Step 2: Verify Eligibility
Assess the following vectors in your business before applying:
- Operational time: Generally, your business must be operating for at least six months to one year
- Revenue: A consistent, high monthly revenue is necessary, often requiring a minimum of R200 000 or R1 million+ per annum. This is dependent on the lender you choose.
- Compliance: You must be registered with the Companies and Intellectual Property Commission (CIPC) and have tax clearance from the South African Revenue Services (SARS)
- Ownership: If you select a specialised funding programme, it might require that the business be at least 51% black-owned
Step 3: Prepare your Documents
Ensure you have the following documentation ready before you apply:
- Recent bank statement (3-6 months)
- CIPC registration documents
- Annual financial statements
- ID documents of business owners or directors
Step 4: Submit Application
Typically, lenders will require an online application, but some will allow you to apply manually in-person. Consider the following:
- Online application: Register and submit the request online, linking your bank account to allow the lender to analyse real-time performance
- Receive a quote: The lender will provide you with a tailored quote based on your revenue, outlining the total cost of the financing
- Approval and funding: Once accepted, funds are transferred to your bank account within hours.
