A revenue loan is similar to a traditional loan except that, instead of the borrower repaying the lender the principal loan amount together with interest, the borrower will pay the lender a percentage of its net or gross profits until the principal loan amount plus a multiple or cap has been received by the lender. The multiple or cap is similar to the interest element payable on a traditional loan.
The advantages of revenues loans
There are undoubtedly advantages for businesses entering into revenue loans. These advantages include the following:
- If your business is not eligible to obtain a traditional loan from a bank (because of its credit risk profile or lack of credit history) you may be able to obtain a revenue loan, particularly if you offer the lender security over your business and its assets.
- If you cannot convince investors to invest sufficient amounts of capital into your business (because they feel it is too risky) they may be willing to grant you a revenue loan, particularly if you offer them security over your business and its assets.
- If you do not want to give away a large amount of equity in your business for a relatively small amount of capital from angel investors or venture capitalists, you may be able to get them to provide you with a revenue loan. Again, offering them security for the revenue loan is likely to make this prospect more appealing.
- If your business is a start-up, it may struggle to meet interest payments on a traditional loan. With a revenue loan, the business only needs to make payments when it makes a profit (i.e. when it has money in its bank accounts). Accordingly, the business is less likely to default and find itself in difficulties.
The disadvantages of revenue loans
The main disadvantage of a revenue loan is that, due to the fact the loan is so risky, the borrower generally has to pay between 20 to 30 per cent. of the net profits of the business until the revenue loan (i.e. the principal loan amount plus the multiple or cap) has been repaid in full.
This incentivises the business to grow quickly so that it can repay the revenue loan within a short period. If your business is likely to grow slowly or have low profit margins, a revenue loan is unlikely to be the right option for you. Equally, if your business is a start-up wanting to re-invest all of its profits into the business for growth purposes, then a revenue loan will not be suitable for you.
Conclusion
If your business is looking for ways in which to raise funds for growth, then there are various options to consider in addition to your traditional bank loan or equity investment. One of these options is a revenue loan. However, there are advantages and disadvantages to revenue loans, and they are not suitable for all businesses. If you require any assistance in understanding the different funding options available and which might be best suited for your particular business, please do not hesitate to contact LegalVision today. One of our business structuring experts would be delighted to assist you!