Purchasing and maintaining the right equipment is essential for manufacturing companies to stay competitive and keep operations running smoothly. Revenue-based financing is often the best way to fund equipment purchases.
There are many ways to fund equipment purchases, and each comes with its own advantages and disadvantages. However, revenue-based financing is one of the best ways to secure your business’s liquid capital to thrive. Here’s why.
Types of Equipment Financing
Equipment financing options come in many different variations, each with pros and cons. To understand which route is going to be the best for your business, it’s helpful to know what the options are.
- Leasing Equipment: Leasing is a flexible way of financing upgrades or maintenance of your mission-critical equipment. However, leasing means you don’t end up owning the gear, and these types of financing options can be more expensive in the long run.
- Government Loans: Getting financing from a government entity, such as the Small Business Administration (SBA), is a great option since they tend to be low-cost and have longer repayment terms. However, they are relatively inflexible, have lengthy application processes, and may have stringent qualifications to be eligible.
- Equipment Financing: Equipment loans are a straightforward option for financing capital purchases. They’re flexible and can help spread the cost of purchases over time. However, the equipment is used as collateral, and these types of loans can have higher interest rates compared to other financing options.
- Revenue-Based Advances: Revenue-based financing is one of the best ways to fund capital equipment purchases. They are very flexible, offer quick and easy access to capital, and don’t require collateral — meaning any equipment you purchase is yours to keep.
Picking the right financing option for your business will come down to your company’s financial health and other factors. However, for most businesses, a revenue-based advance is a flexible, quick, and simple way to secure the liquid capital you need.
How Revenue-Based Financing Works
Revenue-based financing is an agreement between a company and a financier. Essentially, businesses receive liquid capital upfront in exchange for a specific percentage of future revenues.
For example, if you receive a loan with repayment terms of 20%, you’ll pay back 20% of your monthly revenue. If you receive $1,000 in revenue in a given month, you’ll pay $200 toward the loan. If your repayment terms are 10%, then you’d pay back $100.
This type of financing is highly flexible since repayment amounts are highly dependent on business performance. This means that the more revenue you have coming in, the quicker you’ll pay back the loan.
When revenues are lower, the repayments are lower.
Why Revenue-Based Financing is Perfect for Manufacturers
Because of its flexible repayment terms, revenue-based financing is an attractive option for manufacturing companies that have fluctuating or seasonal sales. During the slow months, your financing payments are lower overall, which can help preserve capital and maintain operations.
Additionally, revenue-based financing doesn’t come with any usage restrictions, meaning you can use the funds at your own pace and for whatever kind of capital equipment your business needs as the seasons shift. This type of financing is also a good option for businesses with below-average credit. As long as your business has provable income, you can secure a revenue-based advance.
One of the only cons with revenue-based financing is that the interest rates tend to be higher than typical financing options since there aren’t any assets to back the loan. With that being said, the flexibility and easy repayment terms are often worth this small downside for many types of businesses.
Lastly, revenue-based financing is generally very quick. With some companies, you can receive a funding decision within a few hours, and get your financing within 24 hours.
How to Get Revenue-Based Financing
Here’s an outline of the process for applying for, receiving, and using a revenue-based advance.
- Plan ahead: Before committing to a revenue-based advance, you’ll need to carefully review the terms of the loan. From there, you’ll want to forecast at least several months of revenue and account for your repayment terms.
- Apply for financing: Once you understand the terms of your loan, you can apply for financing. To do so, you’ll likely need business information and financial documents. A hard credit inquiry isn’t generally required, though some financing companies perform a soft inquiry.
- Receive funds quickly: For many manufacturers, you can receive the funds in your account within 24 hours. From there, you can use it on the equipment and upgrades your business needs.
- Repay the advance over time: You’ll repay a fixed percentage of your monthly revenue over time, which can help relieve some financial pressure during slow months.
Whether you need to maintain current operations or purchase manufacturing equipment, revenue-based financing is a quick, flexible, and straightforward option, which can help free up time and energy to focus on what really counts: maintaining your competitive edge and ensuring that your business can thrive.