The lending environment continues to be tight with banks holding potential borrowers to strict standard. As a result, businesses have begun to explore new ways of obtaining financing. One such method is called revenue-based financing (RBF). Is this type of financing right for your business?
How does it work?
The lender issues a loan and the interest payment is based on the company’s revenue over a specified length of time. For instance, the small business would pay the lender 2-5% of revenues each month. If revenues drop from $30,000 to $20,000, the borrower owes $400 as opposed to $600 in the prior month, which is based on a 2% interest rate. Therefore, it is conceivable for the company to pay no interest at all if the revenues went to zero for one month. (more…)