The Pros and Cons of a Revenue Advance
One of the many ways a small business can obtain funding is through a revenue advance (RA). With this funding product, you draw an advance on future sales. Since it's not a loan, the RA charges a factor rate instead of an interest rate. (See "Did you know?") Your business repays the funds with an agreed-upon percentage of daily or weekly receipts.
As is the case with any funding product, revenue advances come with advantages and caveats. If you're considering this financing route, take some time to learn how they work — and for what sort of situations they're best suited. Consider these pros and cons:
What are the advantages of a revenue advance?
Quick funding. Banks can take weeks or even months to finalize a loan. But what if your business has an immediate working capital need—such as an opportunity to purchase discounted inventory or hire more workers for a big job? With a revenue advance, funds are often available within a week — and many lenders make lump sum payouts in 72 hours or less.
Repayment correlates to cashflow. The RA's payment structure contributes to its popularity. A traditional term loan requires the same set payment, usually monthly. This set amount can constrain a business — especially one with a fluctuating cashflow. With a revenue advance, a percentage of your business' sales repay your balance. So if you're a pool club with winter doldrums, you won't pay as much on your revenue advance in January as you will in July.
Business or personal credit scores are less relevant. For younger businesses, or for those with a weak credit score, a revenue advance is particularly attractive. The funder may check your credit. But it's your proof of a robust cashflow that makes the deal.
Future payments function as collateral. You may not want or be able to pledge business or personal assets as collateral for a business loan — and with good reason. A revenue advance treats your future sales receipts as insurance.
Prepayment incentives. Some revenue advances may include early-payoff discounts.
What are some drawbacks of a revenue advance?
Higher capital costs. As compared to other business financing options, a revenue advance could result in higher carrying costs. Since RA issuers classify them as "short term" financing, this funding is exempt from interest rate caps. Depending on the aforementioned factor rate and the length of your repayment period, RA funding may not be the best path for your business.
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Cashflow constraints. Most businesses are paid for their goods and services with credit cards, person to person electronic services, cash, or checks. However, some RA companies may restrict businesses from offering their customers incentives for using payment methods other than the one from which the RA gets repaid.
Here's an example: Under the terms of your RA agreement, you may be prohibited from providing discounts for cash payments. As a result, you may feel a cashflow pinch if most of your payments are coming via the designated RA repayment method. This is, of course, less of an issue when your business is going strong.
Consider any restrictions in business operations. A common example of such a restriction in an RA agreement may prohibit you from switching credit card processing companies. You may also need to change and/or extend operating hours, if that applies. Such conditions aren't instant negatives — unless they catch you by surprise and cause other hardships. Think about how such limitations could affect your small business before signing any agreement.
Is the RA a temporary fix for a bigger problem? Accessing short-term capital can be a smart, strategic decision. But if you're glossing over more fundamental issues, whether it's undercharging for your services, overpaying employees, or not having a growth strategy, you could end up in a vicious borrowing cycle.
For small businesses that need short-term financing and have a healthy cash flow, a revenue advance may provide the flexibility, immediacy and terms that help them succeed.
Did You Know?
7% of small businesses applied for revenue advances in 2022 ... and 90% of them were approved.
Source: Federal Reserve, "2023 Report on Employer Firms: Findings From the 2022 Small Business Credit Survey", published 2023
Since 2008, Samlend Financial has distributed $4 billion to 55,000 businesses. Click here or call (725) 247-3823 for more information on how Samlend Financial's working capital solutions can help your business thrive.
