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Is Revenue-Based Financing Right For Your Business?

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.

What about the terms?

Rates and the size of the loan vary by lender and the business applying for the financing, but most loans range from $50,000 to $250,000 and sometimes larger. Interest rates are typically around 20% annually, which is higher than those offered by traditional banks. However, the requirements are less stringent than traditional banks and it only takes a couple of weeks to receive the actual financing.

What are the requirements to receive a revenue-based loan?

Most lenders want to see at least $100,000 in annual revenues and margins should be at or near 50% to pay for the interest. In addition, most of the companies that receive financing are growing quickly, lack high fixed costs, and cannot fund their growth organically. Specifically, software and technology companies are the most likely candidates to receive this type of financing. Businesses in the restaurant, manufacturing and other traditional brick and mortar businesses, wouldn’t be viable candidates for this type of lending as the margins are typically small in those industries. Traditional banks would be the best option for those types of companies.

Will The R&D Tax Credit Be Reinstated Again?

The research and development credit expired for the 15th time at the end of 2011 and wasn’t reinstated as some expected when lawmakers agreed on extending the payroll tax cut in February 2012. While the R&D credit is technically no longer in effect, it is likely that the credit will still be reinstated for 2012 as hearings conducted by lawmakers have been encouraging. Small businesses need to be aware of this credit since most are eligible and never claim it.

Is my business eligible for the tax credit?

If your business focuses on the development of new products or services through innovation in technology or new processes, the R&D credit should be considered. This is often overlooked by entrepreneurs, who assume they must have on-site laboratories or breakthrough research to claim the credits. Or they may fear they’ll face complex tax calculations or trigger an IRS audit.  However, small and medium sized businesses that employ engineers or outsource product testing, can claim R&D credits. These credits are particularly good for startups, since R&D costs incurred in years when a company has no income can be carried forward to offset taxes on future profits.

How is the R&D credit calculated?

There are two basic methods for calculating a company’s research tax credit: the regular method and the alternative simplified. The details of the calculation are complex, but the basics for the regular method are as follows: Under the regular method, the credit is calculated as 20 percent of the amount of qualified research expenses for the year that exceed a specified base. The IRS just wants to make sure that you are increasing your investment in R&D as a percentage of sales each year. This means that you are spending money hiring new employees that improve a design, process, product or service.

When will the credit be reinstated?

It is difficult to predict exactly. However, lawmakers will likely meet after the November elections to decide whether or not they want to temporarily extend the bush tax cuts. One of the topics that will likely be reviewed and reinstated is the R&D tax credit. We believe this time around, it is quite possible that this credit could be made permanent.


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