5 Situations When Your Small Business Can Benefit from a Revenue Share Loan

05 Jan, 2017 / Comments: Comments Off on 5 Situations When Your Small Business Can Benefit from a Revenue Share Loan / By

A revenue share loan is a loan structured differently than a traditional small business loan.  Rather than paying a fixed principal and interest amount each month, you pay back a percentage of your revenue until you have paid a predetermined amount.  These types of loans are very attractive to small businesses who have had difficulty obtaining a small business loan from a bank.  A great example would be, if you borrow $50,000 and your revenue share amount is 5% with a predetermined repayment multiple of 10%, you would pay 5% of your monthly revenue until you have repaid (50*1.10) = $55,000.  The repayment process could take a longer time if your revenues are low, or it could be wrapped up in a short time if you have high revenues.  For this reason, revenue share loans do not involve a predetermined interest rate; rather, they utilize the repayment multiple with the understanding that the interest rate will end up being different from the repayment multiple. Here are 5 situations where your business could come out ahead with a revenue share loan.

 

1.  You Cannot Obtain Traditional Funding

 

It is more difficult than it used to be for small businesses to obtain traditional loans.  If you find yourself in this situation, a revenue share loan could still provide the funding you need.

 

2.  Your Income Stream is Unpredictable

 

If your business operates in an industry where revenue is unpredictable, it can be cumbersome trying to scrape together the money to make fixed loan payments each month.  In this situation, a revenue share loan would let you get the funding you need without making a monthly payment commitment that you may not be able to keep.

 

3.  You Are Purchasing Real Estate for Your Business

 

If you need to purchase land for your business, and if you anticipate selling that land before the loan is paid off, you may want to use a revenue share loan to do so.  This is because real estate prices fluctuate and a purchase using a traditional loan will leave you on the hook for a set payment regardless of how much you sell the land for. On the other hand, using a revenue share loan, the profit (or loss) you realize on the sale of the land will be included in your revenue stream.  That means if you take a loss when you sell the land, the payment you must make will decrease accordingly.  You’ll still be on the hook to repay the loan, of course, but you won’t have to make a payment that you can’t afford.

 

4.  When Launching a Startup with a New Product or Service

 

If you are bringing a new product or service to market, it can be hard to gauge exactly how well it will sell.  Rather than signing up for onerous fixed payments, using a revenue share loan will let you pay as much (or as little) as you can afford until such time as your new product or service establishes itself as a solid performer.

 

5.  You Are Investing in Yourself or Another Key Employee

 

If your business is a sole proprietorship, or even a small business with only a few employees, then a single employee’s knowledge, skills, and abilities will play a proportionately higher role in the business’s success than it would if you were a member of a 500-employee firm. If you need to pay for schooling for additional training, a revenue share loan might be a good fit.  Given the inherently unreliable return on most forms of education, and given the unpredictable rate at which those returns come back, it makes good business sense to avoid fixed student loan payment amounts. Of course, you will have to structure this as a business, and not a personal expense, but if you talk to a tax attorney, he or she will be able to help you do this properly.

 

William Mahnic
William Mahnic is a Finance Professor at Case Western University and has spent more than 20 years in the finance industry before becoming a professor. Mahnic has appeared as a commentator on both TV and radio talk shows including NPR, Crain's Cleveland Business, WKYC 3 and The Washington Post. He has been interviewed in BusinessWeek, Wall Street Journal and The Los Angeles Times.

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