Revenue-Based Finance 2024: What Small Businesses Need to Know

The turbulent state of the economy means that small businesses in the UK should always be on the lookout for sources of funding. Taking advantage of these opportunities could be the difference between survival and bankruptcy when the economy takes a turn for the worse.

While traditional options like bank loans offer some level of security, revenue-based finance is a particularly attractive alternative funding option for UK-based SMEs in 2024. In this article, we’ll take a closer look at revenue-based finance, explaining what it is, its benefits, and how you can acquire this type of funding for your business.

There are multiple different models for financial lending. The differences in these models are primarily focused on how the lender recoups their investment.

For example, in traditional bank loans, the lender will require minimum monthly repayments and usually charge some form of interest on the loan. Alternatively, investors might require some amount of equity in the business in exchange for providing funding, allowing them some say in major business decisions. This model is common in equity funding.

In revenue-based financing, the lender receives a small percentage of every card transaction made by the business. The percentage is based on the business’s projected monthly earnings — this is the “revenue-based” part of the concept.

This model allows businesses to access revenue-based financing without the pressure of making set monthly repayments.

Small businesses often need to offer their own personal assets (such as their car or house) to cover the loan, which, when combined with fixed payment plans, can make for a very pressured financial situation – not to mention huge consequences for the failure to repay.

With this in mind, revenue-based finance has a number of advantages over traditional bank loans:

As we mentioned previously, revenue-based financing is repaid with a small percentage of your monthly card transactions. The actual sum varies depending on how much your business is making. You pay less when you aren’t selling particularly well, and you pay more when your revenue is high.

The better your business is doing, the faster your loan is repaid. As such, it benefits a business that’s received revenue-based finance to reinvest the money into something that is directly profitable.

For example, if you receive funding at the end of the year, you might reinvest some (or all) of it into optimising your Christmas business ideas. Doing so helps increase your December revenue, which means paying the finance back faster.

Some sources of funding will require you to give up some of the control you have over your company in exchange for their financial support. The most notable examples are venture capital firms and angel investors.

Giving up a (potentially significant) level of control over your company as a small business owner can be difficult, especially if you have a personal connection to your business. Alternatively, your investor may not have the same level of industry experience as you, which may make you think twice about giving them sway over the development of your business.

With revenue-based finance, you get to keep full control over your business. There is no need to dilute ownership or share equity, which means you don’t need to accommodate the lender’s preferences in your decision-making. This level of freedom can make revenue-based finance a preferable option for many small businesses.

Although bank loans are a very old and traditional source of finance for your business, they remain one of the most popular sources of funding among UK-based small businesses.

One of the main reasons why people still look to banks to finance their entrepreneurial ventures is that most banks are seen as trusted and familiar institutions. This kind of reputation might give small business owners a greater sense of security than they would feel receiving funding from an alternative funding source like revenue-based finance. That said, banks are highly susceptible to changes in economic conditions: the collapse of Silicon Valley Bank earlier this year demonstrates that even large banks are not infallible.

Another big selling point for bank loans is the predictability of repayments. With fixed-rate bank loans (where the interest rate doesn’t change), it’s very easy for businesses to budget and plan for monthly loan payments. With revenue-based finance, repayments can change, which might be inconvenient if a business is struggling financially and needs to keep track of every penny.

On the other hand, bank loans are comparatively very difficult to qualify for. You’ll need a well-written, well presented business plan to apply for a bank loan, as well as a great credit history and valuable assets that can be used as collateral. With revenue-based finance, you simply need to complete an application and the lender will do the rest.

Additionally, interest for bank loans are rising considerably. The current Bank Rate is 5.25%, which was raised by 0.5% in June and again by 0.25% at the end of August. With economic conditions still looking poor, it may be that the Bank Rate rises again, which would make bank loans an unattractive option for small businesses.

If you’re not concerned about giving up partial control of your company, equity finance can be a good way to source a very large sum of money. But while there are benefits to this method of lending, there are considerable disadvantages to consider as well, particularly in comparison to revenue-based financing.

Although the main examples of equity financing that we’ve looked at elsewhere in this article were third-parties like angel investors and venture capitalists, there are much smaller-scale versions of equity finance. For instance, it’s entirely legal to enter into an equity financing agreement with friends or family if they are willing and able to invest in your business.

Additionally, equity financing does not necessarily need to be repaid. Instead, investors can recoup their money through dividends or selling their stake to someone else. This makes equity finance a low-pressure option if a small business is looking for long-term funding but aren’t able to repay that funding very quickly.

However, this makes equity a very long-term prospect, mostly suited for small businesses that need startup cash or are looking to expand their business to the next phase. If you need money to purchase new equipment, pay staff, cover bills, or finance a new branch of your company, equity finance might not be the right choice. In these situations, revenue-based finance can provide much more immediate financial support.

Revenue-based finance is a great option for small businesses looking for easily-accessible funding options. If you’re looking for revenue-based finance, make sure you secure it from a reputable and reliable source, such as 365 finance.

At 365 finance, we prioritise your easy access to business funding. Our application form is simple and can be filled out in minutes. Once it’s complete, you can be approved for funding in less than 24 hours without having to provide a guarantee or a business plan. We’ll also allocate a relationship manager to your business in case you have any follow-up queries regarding your finance.

 At 365 finance, we can provide both long and short-term financial solutions, with revenue-based funding available from £10,000 to £400,000 in capital. Apply for funding today without affecting your credit score, or speak to our team to find out how we can help your business. To find out more, head to our website.