Business owners often need funding to expand their operations, hire more employees, or invest in new technology. While there are numerous financing options available, it’s important to choose a funding option that aligns with the business’s financial situation, goals, and cash flow. Two popular options are revenue-based funding and merchant cash advance, but what are the differences between the two? Let’s explore.
Accessibility and Requirements
Both revenue-based financing and merchant cash advance are accessible to businesses with less-than-perfect credit. However, there are differences in their eligibility requirements. Revenue-based financing requires a strong cash flow and consistent revenue generation year-round, while merchant cash advance is suited for businesses that experience extreme highs and lows in cash flow and revenue. Merchant cash advance eligibility primarily relies on the amount of revenue generated from debit and credit card transactions, whereas revenue-based funding requires proof of strong monthly revenue in general for at least the past three months or more.
Let’s say you own a seasonal business that experiences a surge in revenue during the summer months, but slower sales during the off-season. A merchant cash advance may be a good option for your business, as it relies heavily on the amount of revenue generated from debit and credit card transactions. During the busy season, you’ll have a higher volume of transactions and therefore a larger cash advance amount available. However, during the slow season, you may not qualify for as much funding or may have higher fees.
On the other hand, if you own a business with consistent revenue year-round, such as a subscription-based service or a manufacturing company, revenue-based financing will be a better fit. With revenue-based financing, you’ll need to provide proof of strong monthly revenue in general for at least the past three months or more. This option may provide more stable funding throughout the year and may not have the same level of variability in fees and funding amounts as a merchant cash advance.
Payments and Fees
When it comes to payment and fee structures, there are significant differences between revenue-based funding and merchant cash advance. Merchant cash advance payments are automatically deducted from daily debit and credit card sales, with the retrieval rate ranging from 15% to 25%. In contrast, revenue-based funding payments are deducted from monthly revenue at a rate of 2% to 8%, based on payment caps that range from 1.35 to 3.0. Revenue-based funding is typically more flexible and transparent than merchant cash advance.
Alex, a restaurant owner, needs funding to purchase new equipment for his restaurant and is considering both revenue-based funding and merchant cash advance. With merchant cash advance, a percentage of daily credit and debit card sales will be automatically deducted until the loan plus fees are paid off, while revenue-based funding involves a percentage of monthly revenue being deducted. Alex will need to evaluate the advantages and disadvantages of each option to determine which one is the best for his business.
Why Choose Revenue Based Financing?
Revenue based financing offers a more innovative and flexible funding solution than traditional merchant cash advance. It is designed to provide fast access to capital at a fixed cost, without requiring collateral or fixed repayment schedules.
Let’s say that Jane, a small business owner, needs funding to expand her online clothing store. She’s been considering both traditional merchant cash advance and revenue-based financing options.
If Jane chooses a merchant cash advance, she’ll need to agree to an automatic deduction from her daily credit and debit card sales until the total amount borrowed plus fees is paid off. However, if Jane chooses revenue-based financing, she won’t need to worry about automatic deductions or variable retrieval rates. Instead, she will have a fixed cost financing solution that will allow her to repay the borrowed amount as a percentage of her monthly revenue. This way, she can continue to grow her business at her own pace without the burden of a fixed repayment schedule.
Here are some reasons why Precise’s RBF may be the right fit for your business:
Predictable Costs
By choosing revenue-based financing, you’ll know the cost of capital in advance, so you can make informed decisions about your business’s finances and plan your expenses accordingly. This will provide the peace of mind and financial stability to confidently pursue your business goals.
Flexible Repayment
Repayment is based on a revenue-share agreement, meaning that payments are only collected when funds are available. This flexibility ensures that your business has the cash flow it needs to succeed.
Some retail stores experience seasonal highs and lows in revenue, and cause business owners to worry about not being able to make fixed payments. With revenue-based financing, business owners don’t have to worry about making payments during slow periods because payments are based on a percentage of the monthly revenue. This means they can make lower payments during slower months and higher payments during busier months. As a result, the business owner can focus on growing their business without worrying about having to make unaffordable fixed payments.
Fast and Easy Underwriting
Our smart algorithm quickly analyzes your business’s data to create an offer tailored to your growth needs and repayment capabilities. There’s no need for time-consuming meetings or paperwork.
Say that John owns a small online retail store that has been growing rapidly, and he needs financing to expand his inventory. He decided to give revenue-based financing a try. John provides the required information and connects his accounting. Precise’s algorithm quickly analyzes John’s sales data and generates an offer within a matter of minutes. John reviews the terms of the offer and accepts it, and the funds are deposited into his account shortly thereafter. The entire process is quick, simple, and hassle-free, allowing John to focus on growing his business.
No Hidden Fees
Precise’ revenue-based financing is transparent, with no hidden fees or interest rates. You’ll know exactly what you’re paying and when.
Imagine a business owner, Sarah, needs financing to purchase new inventory for her retail store. After reviewing the terms of the revenue-based financing, Sarah decides to go with Precise because of the transparent and predictable costs. With revenue-based financing, Sarah knows the cost of capital in advance, and there are no hidden fees or interest rates. This allows her to make informed decisions about her business’s finances and plan for future expenses.
Conclusion
Both revenue-based funding and merchant cash advance have their advantages and disadvantages, and the right choice depends on your business’s unique needs. Precise offers a revenue-based funding solution that is transparent, flexible, and designed to help businesses grow and flourish.
