An “Advance” of Future, Unearned Revenues

Future revenue advances are a very unique product offered by “alternative lenders”, because they are a hybrid between an investment and a loan. Unlike a traditional bank, alternative lenders assume the day-to-day business risk after they finance a client, because the payback is a fixed percentage of future revenues, and not a minimum monthly payment. If you have a bad month, so does the alternative lender. However if you have a good month, so does the alternative lender. In this regard, the product is similar to an investor sharing in the upside and downside of the business. However much like a traditional loan from a bank, there are monthly payments (no minimums), and a pre-determined payback amount based on your risk assessment.

How it works

The lenders assess the creditworthiness of a business based on their cash flow (i.e. deposits in their bank account) and credit card processing transactions. Typically businesses qualify for 1 month of their average deposits or CC transactions, paid back over 6-12 months. For example, if you earn $100,000 a month, the pay back would be anywhere from $112,000 – $171,000 over 6-12 months. Because this capital is relatively “expensive”, this is a match for a new or existing business in rapid growth mode and can’t obtain capital elsewhere.

The best use of funds for this product are activities that will increase your earnings capacity, such as:

  • Expanding to meet new demand
  • Spending on proven marketing channels with a high ROI
  • Purchase inventory in bulk at a cheaper price
  • Buying out investors that will save tons of money in the long-run

Due to minimal due diligence, this product is great if you’re in need of quick capital (i.e. an emergency or opportunity). Another benefit is that clients often don’t have to worry about paying back the lender; payments are done automatically via ACH sweeps or credit splits. In other words, customers are paying back the lender without the business owners ever touching the money.