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Every business needs equity capital at some point; the problem is, not every business has the necessary equity to acquire it through a traditional bank loan. The reality is, small business loans are becoming more difficult to obtain because banks tend to favor higher loan amounts – and typically, higher loan amounts are requested by higher-profit applicants.
It’s a little-known fact that it costs a bank the same amount of time and resources to write a $10,000 loan as it does a $1 million loan. If presented with applications for both, the bank would rather spend its time on the $1 million loan – leaving the $10,000 loan applicant to wonder how he can get the capital he needs. And now, with 39% of small business loan applicants requesting loans of $50,000 or less, the number of businesses being denied funding is skyrocketing.
Fortunately, there are alternative financing products that can stand in the gap by lending amounts that are on par with equity capital without stripping entrepreneurs of their existing equity. One of those products is royalty-based financing, which is an alternative financing loan that is paid back when the business allocates a percentage off the top of its monthly revenue to the lender. These payments continue to come out of the business’s revenue until the loan is repaid. At the end, the business retains 100 percent of its equity rather than handing over a permanent equity stake to an investor. That’s a big distinction, and an important one.
Yes, handing over a permanent stake in one’s company is a concept that has been glamorized on TV – but that doesn’t necessarily make it the best option for obtaining capital. When companies start making profits in the millions, they rarely enjoy handing over 20 percent to silent investors who came in when they were making thousands. With royalty-based financing, they don’t have to. As an alternative financing expert, I recommend this model to small businesses frequently because it protects their equity while delivering the capital they need to keep growing. In fact, I recommend it to businesses that need higher loan amounts as well. Ideally, loan amounts for royalty-based financing can range from $50,000 to $3 million.
Royalty-based financing is one of the most innovative financing alternatives available to businesses that fall outside of traditional lending parameters. It’s not for everyone, but it’s a great option to keep in mind when a specific amount of capital is needed.