Large, small, and medium-sized businesses today compete for loans to sustain their businesses. The availability of funds determines whether a business will live or die. 

Some businesses are still ideas that rely on loans to become a reality. Other businesses are considering trade lines and rely on loans to achieve their new strategies. Besides, businesses need funds to consolidate their debts and enjoy a consistent capital flow. 

Loans also help businesses overcome financial crushes. There is no doubt, therefore, that loans are more competitive than ever. Being a competition means every business must put its best foot forward. 

Business loans are available in various forms. You can take a working capital loan, a term loan, a letter of credit, bill discounting, an overdraft facility, or a machinery or equipment finance loan. Whichever loan you need, whether it’s secured or unsecured, your lender needs you to satisfy specific criteria. 

If you are wondering what that is, below are the points that lenders consider before crediting your loan.

What is a Revenue-Based Business Loan?

Revenue-based financing is commonly known as royalty-based financing. It’s a funding model used by businesses to raise capital for their businesses from investors who will also be receiving a percentage of the business’s ongoing gross revenues. 

This is what the businesses give the investors in exchange for the revenue based business loans received from certain investors. 

Investors in such a loan agreement receive a regular share of the business’s income until the business has paid the entire amount it owes the investors. In most cases, the amount to be paid back is three to five times the original amount invested into the business. 

Man holding gold coins

Here are five factors lenders consider for revenue-based business loans;

1. A Predictable Revenue Stream

It’s a revenue-based business loan, meaning your revenue is the key determinant of whether or not you qualify for this loan. 

If your business has a foreseeable revenue stream, it may be the ideal candidate for this loan type. Besides, revenue-based loans are better suited for SaaS companies with subscription-based revenue models. You can also look into debt factoring service when your business experiences poor cash flow due to clients.

Lenders most likely fund businesses that have contracts with clients. This is a surety that the business generates some regular income and one that the lender can also predict.

Besides, if your business’s cash flow is low, potential lenders consider your business risk. The message that a low cash flow sends to the lenders is that you spend most of the money on building and growing your business as opposed to catering to their credits. 

Before loaning you, most lenders start by analyzing the income of your business. They look at your business cash flow, check your business bank accounts, and even your bank accounts as the business owner.   

You can salvage the situation if it’s not all rosy now. Set business goals. Regularly conduct a cash flow analysis for your business. Once everything is clear, put down a clearly defined payment cycle. The payment plan should be clear and convincing to persuade possible lenders to loan you regardless of your low cash flow.

2. Your Credit History

Your potential investor has confirmed that your business has a predictable income stream. It doesn’t stop at that. Next, the lender checks your credit history—no one wants to deal with a company or individual that doesn’t pay their loans even if they have a constant stream of money. 

This is both ways—-your potential lenders check your credit score history before lending to you. Therefore, as a business owner, your credit history and that of your business matter. 

If you have an admirable credit history both as an individual and a business, you stand a better chance of getting a business loan. 

Lenders prefer businesses that can repay their loans on time and those that have repaid past loans. While different lenders have specific credit scores that act as the qualification for loans, the average credit score is between 700 and 750. A good credit history also translates to better money management skills. Additionally, when seeking business loans, a solid credit history, both personally and for the business, becomes even more crucial for securing favorable terms and swift approval.

Conversely, businesses with low credit scores and poor credit history, usually a below 680 CIBIL score, are a serious risk. Lenders fear that such businesses cannot repay their loans.

3. Documentation

Sorry to say that you can tick all the boxes, but with the right documentation, you can get a revenue-based business loan. Some of the documents you should have before an investor can give you a revenue-based business loan include;

  • Personal and business tax returns
  • Bank statements
  • Business licenses and permits
  • Proof of collateral
  • Balance sheet
  • Employee Identification Number (EIN)
  • Copy of your commercial lease
  • Accounts payable and accounts receivable aging
  • Ownership and affiliations
  • Disclosure of other debt
  • Legal contracts and agreements
  • Business insurance plans
  • Payroll records
  • Incorporation documents
  • Business plan

Remember, different lenders may ask for different documents. So, before applying for a loan, check out your target investor’s requirements.

4. The Loan Purpose

Interestingly, an investor would want to know what you want to use a revenue-based business loan for before giving you the money. You should satisfy the target lender that you’ll utilize the funds to finance a long-term project or support some short-term working capital. This helps the lender predict whether your business will be generating money regularly so that they can also receive their dues regularly. Lenders would feel unsafe pumping their money into risky ventures that may never come to be.

5. The Current Economic Environment

An investor would be cautious about investing huge sums of money in a business during an economic recession. These investors, therefore, analyze the prevalent economic and business environment and observe trends in the specific industry you are in. Investors also be curious about how the current environment is affecting your specific industry. 

Manufacturing businesses get affected differently compared to service industries at any particular time. Inflations are also elements that influence economic environments and may be used by lenders to determine whether or not to loan you. 

Final Thoughts

Revenue-based business loans are a good form of loans for all types of businesses. With this loan type, a company doesn’t have to give up any of its equities to the lender. 

Again, companies don’t have to struggle to meet a fixed installment as they repay their loans based on the revenue they generate. 

Whether you want a revenue-based business loan for a short-term project or a long-term project, you can comfortably borrow. So, strive to meet the above five key factors that lenders consider before giving you this loan to enjoy all the benefits that come with access to this loan type.