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Revenue Based Financing

Revenue based financing is something that a lot of business owners are turning to – especially those businesses that have an uncertain future, or a seasonal nature to their sales. Revenue based financing relates to the income a business has – as the revenue fluctuates, so do monthly repayments on the finance. This allows businesses breathing space and greater flexibility – it means they don’t have to commit to repaying a rigid amount each month.

Merchant cash advances

The reality of the matter is that merchant cash advances are a true revenue based financing option. With a cash advance you’re not tied into unforgiving, fixed monthly repayments. Instead, your business only ever pays off a pre-agreed percentage of the amount outstanding – the percentage you repay is based on the sales performance of your business.
That means if your business encounters a strong month of sales the merchant cash advance repayment will be high. If it encounters a weak month with few or no sales, the repayment will be negligible. This flexibility is something that draws lots of people to choose merchant cash advances over bank loans.

Revenue based bank loans

Most bank loans come with rigid repayment schedules and amounts – on the same date each month you’ll have to repay the agreed sum – there’s no two ways about it. Increasingly banks are being encouraged to be a little more flexible in their lending to small  businesses in particular – in an effort to get the economy booming once again. One of the emerging trends is an increase in the uptake of revenue based bank loans – they eliminate the need for fixed monthly repayments, and introduce much easier to manage, flexible monthly repayments.

The repayment schedule used on a revenue based financing loan is slightly different to that of a merchant cash advance. With a merchant cash advance there is no interest accrued over the course of the financing period – you’ll simply pay an amount on top of what you borrow, plus fees. That means you’re always working towards paying off a fixed amount. With a bank loan however you’ll still be accruing interest – so if your business did hit a low period of sales, the sum outstanding would continue to grow.

There’s a good deal of choice out there when it comes to revenue based financing – the main decision to make is whether you go with a fixed total sum to repay in a merchant cash advance – or a variable total sum to repay with a revenue based loan. If it takes you 10 years instead of five years to pay off the loan, you could end up paying a lot more in interest than you have first envisaged.