Revenue-based lending is a financing option where a lender provides capital to a business in exchange for a percentage of its future revenue. Instead of charging interest, the lender receives a percentage of the company’s gross revenue until the loan is repaid, often with a cap on the total amount paid back.
When does revenue-based lending make sense for eCommerce businesses?
- Limited collateral: RBL is a good option for businesses that lack collateral or have limited assets to offer as security. In the case of eCommerce businesses, where the majority of the assets are intangible (such as the website, customer base, and intellectual property), RBL can be an attractive option.
- Need for flexibility: With traditional loans, you have to make fixed payments, regardless of your revenue. With RBL, your payments are based on your revenue, so if your business has a slow month, your payment will be lower. This flexibility can be especially important for eCommerce businesses that experience seasonal fluctuations in sales.
- Rapid growth: If your eCommerce business is experiencing rapid growth and needs cash flow to fund operations or inventory purchases, RBL can be a good fit. Unlike traditional loans, RBL is tied to your revenue, so the more revenue you generate, the faster you can repay the loan.
- Limited credit history: If your business is relatively new or has a limited credit history, traditional loans may not be an option. RBL providers typically focus more on the revenue and growth potential of your business than your credit score, making it a more accessible financing option.
- Quick funding: Traditional loans can take weeks or even months to secure, which can be problematic if you need cash quickly. RBL providers, on the other hand, can provide funding within a matter of days or weeks, making it a good option for businesses with urgent funding needs.
What are some potential pitfalls to avoid with revenue-based lending?
While there are some benefits to revenue-based lending, there are also some things to keep an eye out for.
- Cost of capital: While there is additional flexibility in these loans, this can come with higher effective interest rates. It is important to understand how much total is being repaid to the lender and over what period of time.
- Impact on cash flow: Since repayments are tied to revenue, businesses might experience reduced cash flow that can be used for other business activities. Make sure the repayment terms are aligned with your expected revenue growth and your cash flow forecasts. It is also worth discussing if the lender is willing to insert caps on the total dollar amount repaid each month to avoid paying back a large amount of capital during your peak months.
- Business volatility: Given the payments are tied to revenue, companies that are at risk to seasonal downturns can see the repayment of revenue-based loans really impact their business during the slower periods. Leverage your sales forecasts and cash flow forecasts and discuss your expectations with your lender.
- Limited availability: Most revenue-based financing companies are limited to using your eCommerce revenue for lending. If you have an omnichannel or retail-exclusive business, you would likely benefit from securing a more traditional, asset-based line of credit with cheaper cost of capital and repayment that is more aligned with your cash flow.
While RBL may not be the best option for every eCommerce business, it can be a good fit for those who lack collateral, need flexibility, are experiencing rapid growth, have a limited credit history, or need quick funding. As with any financing option, it’s important to carefully consider the terms and conditions of any RBL agreement before signing on the dotted line. With the right approach, RBL can provide the funding you need to take your eCommerce business to the next level.