Who would have predicted the growth of an alternative lending market as we see it today? It feels as though it’s beginning to come of age. Whilst growth and maturity are two different things and there’s still much to achieve in the sector, there’s ever an increasing appetite for the wide range of alternative finance products emerging from this funding revolution.
After seven years in the UK market, revenue based funding is gaining ground and enjoying a popularity not seen before. From small beginnings, at a time when small business funding was a bank loan and anything else was viewed with scepticism, revenue based funding is one of, if not the, fastest growing alternative finance product, seeing high double digit growth month on month.
So what’s happened? Revenue based finance has found a niche in the emerging alternative funding portfolio because it combines all the positive aspects of debt and equity finance and none of the negatives. It’s flexible, short term funding with performance related repayments, without giving up any of the business or risking personal or business assets as security. There’s no other product like it. It is a very effective funding solution particularly for micro and small businesses who need easy access to working capital, as well as those who need it for growth. The goal for the majority of micro and small businesses is to continue trading and to maintain profitability and their biggest daily challenge is cash flow management. With conditions for bank lending and overdrafts changing, the funding options for them are very limited.
The premise of revenue based funding is simple and transparent; it’s an unsecured advance of cash based on future credit and debit card sales and is repaid via a pre-agreed percentage of the business’s card transactions. Because payback is directly linked to card takings, it only happens when the business earns, so it’s directly linked to cash flow. In contrast to equity funding, the business owner never relinquishes part of the business or any control of it and unlike debt, re-payments aren’t fixed nor is security required. Furthermore, unlike any other finance product available, if the cash advance takes longer to pay off, the originally agreed repayment cost remains the same. No penalties or fees are added, because there’s no such thing as late payment.
Revenue based funding provides easy and quick access to working and growth capital (typically between £2,500-£300,000), that doesn’t require detailed application and transaction processes that secured and asset based lending products do. Small businesses, even those with adverse credit status so common amongst young businesses and sole traders, can have a cash injection they need within seven days, or as is more often the case, sooner.
As with any product with low awareness, it can be hard to convey the benefits as people often see the price before anything else. The cost of capital is relative and what’s good for one business might not be for another. Typical factor rates for revenue based funding are between 1.15 and 1.35; it’s a single, set price, totally inclusive of all costs associated with the funding. A typical £10,000 cash advance will have one simple cost of finance of between £1,500 and £3,500. There are no other charges, penalties, set up fees or indirect costs such as legal or management time out of the business to organise.
The economic crisis has opened up opportunities for new and innovative funding sources for small businesses and their funding landscape is looking more diverse and vibrant than ever before. As this new sector matures, we must maintain that breadth of funding options, with appropriate safeguards and regulation of course. For too long the small business community has been treated as a homogenous group when it comes to funding and look where that got us.