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Small businesses favoring revenue-based funding over traditional bank loans

Jan 17, 2013 Sean Albert

Small businesses favoring revenue-based funding over traditional bank loans

Paying off loans with revenue from future earnings is one of the alternative financing models that small business owners are turning to so they don't have to hand over equity to banks and other investors. Increasingly, revenue-based funding (RBF) is becoming the entrepreneur's financing of choice.

Eric Estoos, who runs a cloud computing firm, told Fox Business that was the case when he sought financing two years ago and didn't want to trade equity in his company, as he would have had to do with backing from venture capitalists.

Instead, Estoos landed an RBF deal that gave him as much as three years to pay back what he owed, based on a percentage of company revenue, rather than a fixed-interest payment every month as most banks require.

With $100,000 in RBF money to invest in his operation, Estoos told the news source he has see his sales increase by 260 percent.

"We've been able to double staff, we've moved into a 3,000-square foot office, we are now truly a functioning company. I've gone from chief doer to managing departments," he said.

RBF getting stronger

RBF is an alternative financing method that's been used in the pharmaceutical and entertainment industries for many years, but now start-ups and small firms are among its biggest proponents, Fox Business reports.

Most RBF loans range from $50,000 to $250,000 with revenue payments falling into the 3 to 5 percent range, according to financing firm Lighter Capital. Many clients are able to have their money in hand a week after filing their application.

"Instead of taking equity as a bank would or take a personal guarantee, we are taking a percentage of revenue for a period of time until they pay us back," explained BJ Lackland, CEO of Lighter Capital, who likened the revenue payments to a "royalty stream to us."

Alternative financing like RBF deals was named by Entrepreneur Magazine as one of the top trends that will be shaping the business community in 2013. Small businesses are becoming frequent clients because they are the ones that tend to have the most difficulty convincing banks to fund projects.

Reuters reports that merchant cash advances, for instance, grew from $800 million in 2011 to $1 billion last year, based on figures from the North American Merchant Advance Association. When retailers, restaurants and other businesses do a high volume in transactions made with ACH cards, prepaid debit and credit cards, they can receive a lump sum in exchange for a share of future card-based sales.