There are so many companies that come to Flow excited about starting revenue-based financing. Unfortunately, not all businesses are at the right stage that best fits our financing model. If you haven’t reached $1M+ in annual revenue and are still in the beginning stages of growth, here are some options for financing to help get you there. 

1. Traditional Bank Loan

Traditional bank loans are a great option prior to revenue-based financing because they are typically the lowest cost of capital of any lender in the marketplace. You can expect to get the lowest interest rate available. 

In terms of applying for a bank loan, it’s best to start with a local bank first. Open a bank account for your business and begin using it. This will help start a relationship with the bank. You can also try developing a relationship with the business loan officer who could eventually help you once your application goes through. For extra tips, here’s a helpful article: How to Secure a Business Loan: Tips From a Banking Executive

The main thing to keep in mind with bank loans is the application process is painfully slow. Banks require a lot of information, so it will take them a while to process everything. Securing a bank loan can take anywhere from 2 to 6 months. 

2. A/R Financing

Also known as factoring, A/R financing is a short-term loan where money borrowed is based solely on money owed to your company through accounts receivable. It is typically used as a short-term solution for when you need a boost of working capital to get you through the next couple of months. 

A/R financing provides you a percentage of your “qualified A/R,” which is A/R with less than 90 days outstanding and has a minimum of $5K per customer. Be aware that some A/R financing companies will require your customers make the payment directly to them. 

The cost of A/R financing is typically 15-25%. While this is feasible as a short-term solution, it is not a practical option for funding the future growth of your company.

3. Online Lenders

There are two types of online lending: merchant cash advance lenders and peer-to-peer lenders.

Merchant cash advance lenders lend money based on anticipated future credit card sales to customers. The lender takes a certain percentage of every credit card sale you make until you pay back the amount you borrow plus the agreed-upon interest. Merchant cash advances typically charge a high interest rate and require very fast turnaround (less than 24 months). Because the lender collects payments from credit card sales either daily or weekly, merchant cash advances provide you with very little time to actually utilize the capital. 

Merchant cash advance lenders provide merchant cash advances (MCA). MCAs are not loans, but rather advances based on the future revenues or credit card sales of a business. MCA providers evaluate risk and weight credit criteria differently than traditional banks by looking at daily credit card receipts to determine if the company can pay back the advance in a timely manner. MCAs typically have higher interest rates and require a fast turnaround (within 24 months). 

Peer-to-peer (P2P) lenders provide money through online services that connect lenders with borrowers. The lenders are those interested in generating higher yields on their capital than they would leaving it in a savings account with minimal interest rates. For companies, P2P loans generally have lower interest rates compared to traditional financing and requires less paperwork than traditional bank loans. 

With these three options, your company will be better positioned for revenue-based financing. For more information about revenue-based financing, be sure to read our Founder’s Guide to Revenue-Based Financing.

Interested in Revenue-Based Financing?

Flow Capital offers founder-friendly growth capital for high-growth companies.