So we have covered our top 3 loan products available to SMEs, which are (1) Unsecured business term loan , (2) Invoice Financing, and (3) Property-backed Loan. Despite these available options, many SMEs still struggle with obtaining financing as they do not have invoices with large corporates or have a property to collateralize.
Thus, we will be introducing a new alternative, Revenue-based financing that has gained popularity over the past few years. Essentially what revenue-based financing does is that it reduces the pressure of fixed repayments and converts them to flexible repayments proportionate to your monthly revenue. This means that you no longer need to be stressed on a single lull month as a slower month means a smaller repayment sum.
Here’s a quick summary on the benefits of Revenue-based financing:
1. Low fees with no collateral
2. Get funded up to 3x your monthly revenue
3. Enjoy flexible repayment based on your revenue
Revenue based financing as the name goes is a loan whose repayment is pegged to the monthly revenue of the company. This is a flexible form of repayment as you repay less when your revenue is low and repay more when your revenue is higher, reducing the stress on companies during a slower than usual month.
It is also good for new companies that can show good record of existing and future revenues. This can be obtained through your sales record on your POS system, e-commerce network like Shopify , Stripe, or even delivery platforms (e.g. Grab or Deliveroo). Businesses that have digital integrations to their accounting software can also help lenders get a better perspective on your revenue trends. This means that cash heavy business might need to consider moving payments digitally through PayNow so that every cent is digitally captured and can be used to justify your loan.
Consistency of revenues is also an important element for lenders to assess your credit. Businesses that provide subscription services or have high level of stickiness such as aesthetic clinics and gyms would be perfect candidates for a financing as such.
Loan disbursement is typically the same as an unsecured business term loan and the maximum loan amount is typically a up to 3x of your monthly revenue. The key difference is in its repayment, and you can see below for a quick example of how flexible a revenue based financing can be.
Example:
Shally runs a Peranakan Cafe in Tanjong Pagar that does both dine-in and delivery orders on Grab Food. She also sells her packaged chilli sauce on Shopee. As such, all her revenue can be easily tracked via her POS system in store, Grab app and on Shopee. With a total monthly revenue is $50,000, her business was extended a revenue-based loan based with the following terms.
Repayment Schedule:
Looking at months 4 and 9 where revenue was $20,000 and $15,000 respectively, repayment was only $4,000 and $5,000 respectively.
Assuming you make good on your repayments (no late charges), your total financing charges are made known to you upfront. This is mainly made of 2 fees, first is the financing charge and the second is the processing fee. The financing charge can range from as low as 8% to 15% and is added to your principal where your repayments will work towards paying down. That means that a financing charge of 10% will put your total outstanding to 110% of the total loan amount. The second fee involved is the processing fee, which is paid upfront for the general administration. This can range from as low as 1% to 3%.
Beyond that, there is no additional fees even when if your loan tenor goes beyond your forecast. This can act as a double-edged sword where a longer tenor would mean a cheaper financing cost and a shorter tenor would indicate a higher financing cost. Nonetheless, the total absolute cost is the same and determined at the front.
A revenue-based financing acts almost like an equity investment because it provides a higher return when the company is doing well and a lower return when a company is not performing. Hence, it can be said that the lender is sharing more risk with the company as compared to a general business loan. Therefore, there is a greater obligation and participation from the lender to aid the borrower in their business to ensure that they meet their revenue goal. Despite similar benefits to an equity investment, there isn’t the downside of giving up control which is why start-up companies are comfortable with a financing as such. However, pre-revenue start-ups might need to show some operational revenues before considering such a loan.
The third reason is that you can rely on your track record as a form of security even when you do not have any collateral. This means that even if you are a new company of less than 6 months but have displayed a good traction in your business, financiers are able to consider your application. This is the reason why it is important to digitalize so that all forms of sales are captured. While bank statements are traditionally a good gauge, lenders are beginning to realize that bank statement credits do not necessarily equate to sales. Hence, a more efficient way to determine sales is through POS, payment gateways or third-party collections services.
As with all things, there is no free lunch. While revenue-based financing is generally more affordable with zero dilution, one might need to be prepared to be involved on monthly reporting to the lenders. As repayment is based on monthly revenue, it is important that bookkeeping is done in an organized manner and statements from payment gateways, POS, platform apps are consolidated neatly as these need to be submitted to the lenders promptly. Therefore, a small business team might not be able to accommodate to the level of administration required.
The eligibility criteria may differ for various lenders, but most of them require that your company be at least 3 months in operations and registered with an accredited payment provider. The credit score of business owners will also be considered.
You should also be running a business, with at least 30% of the company owned by Singaporeans or permanent residents.
If you are thinking of getting started, we’ve worked out a few options for you.
For revenue-based financing, check out Choco Up, a financing platform that provides startups with non-dilutive funding and a flexible repayment schedule.
Jenfi works on a new model of repayment that involves a percentage of your revenue so you can get funding for your marketing and inventory spend on your own terms.
If you are keen to explore similar solutions, private lender ZETL specializes in invoice financing, as well as payroll financing and credit lines.
All three lenders accept repayment based on future revenue and Lendingpot offers direct access to them through a single application. Apply via Lendingpot to access all three of them at one go.
Leading digital loan marketplace Lendingpot connects SMEs to its network of 45 lenders comprising relationship managers from banks, financial institutions, and private and peer-to-peer lenders in Singapore for free. It aims to help SMEs overcome the information asymmetry problem and lack of transparency prevalent in the SME financing sector by offering SMEs financing options such as business term loans, property loans, revenue-based financing, credit lines, working capital loans, bridging loans, invoice financing, and more.
Benjamin heads up Lendingpot with a background in all things SME. He was previously a commercial banker at Citi with experience in Relationship management, Credit Risk, Trade Operations and Corporate FX sales; and understands the difficulties SMEs face in this opaque world of SME financing.
