Reading time: 3 minutes

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!

Webinars

New Kid on the Blockchain: Understanding the Proposed Laws for Crypto, NFT and Blockchain Projects

Wednesday 25 May | 10:00 - 10:45am

Online
If you operate in the crypto space, ensure you understand the Federal Government’s proposed licensing and regulation changes. Register today for our free webinar.
Register Now

How to Expand Your Business Into a Franchise

Thursday 26 May | 11:00 - 11:45am

Online
Drive rapid growth in your business by turning it into a franchise. To learn how, join our free webinar. Register today.
Register Now

Day in Court: What Happens When Your Business Goes to Court

Thursday 2 June | 11:00 - 11:45am

Online
If your business is going to court, then you need to understand the process. Our free webinar will explain.
Register Now

How to Manage a Construction Dispute

Thursday 9 June | 11:00 - 11:45am

Online
Protect your construction firm from disputes. To understand how, join our free webinar.
Register Now

Startup Financing: Venture Debt 101

Thursday 23 June | 11:00 - 11:45am

Online
Learn how venture debt can help take your startup to the next level. Register for our free webinar today.
Register Now

About LegalVision: LegalVision is a commercial law firm that provides businesses with affordable and ongoing legal assistance through our industry-first membership.

By becoming a member, you'll have an experienced legal team ready to answer your questions, draft and review your contracts, and resolve your disputes. All the legal assistance your business needs, for a low monthly fee.

Learn more about our membership

Need Legal Help? Submit an Enquiry

If you would like to get in touch with our team and learn more about how our membership can help your business, fill out the form below.

Our Awards

  • 2020 Innovation Award 2020 Excellence in Technology & Innovation Finalist – Australasian Law Awards
  • 2020 Employer of Choice Award 2020 Employer of Choice Winner – Australasian Lawyer
  • 2020 Financial Times Award 2021 Fastest Growing Law Firm - Financial Times APAC 500
  • 2020 AFR Fast 100 List - Australian Financial Review
  • 2021 Law Firm of the Year Award 2021 Law Firm of the Year - Australasian Law Awards
  • 2019 Most Innovative Firm - Australasian Lawyer