Comparing Costs of Different Financing Options

Some Questions to Ask Yourself

Below are a few questions you might want to consider before securing any kind of business financing. If you find the answer to most of these questions is “no,” revenue-based financing could be a viable option for you to consider.

• Do I have an asset to borrow against (and do I want to)?
• Do I want to make a long-term commitment to a bank?
• Do I have consistent monthly revenue?
• Can I wait weeks or months for capital?
• Have I been in business long enough to qualify for a loan?
• Do I need more than $300,000?
• Do I have predictable cash flow?
• Do I have a pristine financial history?
• Do I have adequate business credit?

Revenue-Based Financing vs. Loans

Cost is often a big determining factor when small business owners decide what financing option is right for them. Annual percentage rate (APR) is used to determine the total cost of a traditional bank loan. However, with revenue-based financing, a factor rate is typically used to determine the total cost of the funding. Here we’ll explain why APR isn’t a good way to calculate the cost of revenue-based financing, what a factor rate is, and how to compare the cost of a traditional loan to revenue-based financing.

Why is APR not an accurate way of calculating the cost of revenue-based financing?

Annual Percentage Rate (APR) is calculated based on variables typical of a loan, such as fixed payment amount and a fixed payment term. These variables do not apply to revenue-based financing, because the payments are not fixed (they can be adjusted downward if business revenue decreases), and the estimated payment term is not fixed either (if payments are reduced, it would lengthen the duration of remittance or estimated payment period). Therefore, APR cannot be used to accurately reflect the cost of revenue-based financing in the same way it’s used for traditional loans. This is why revenue-based financing providers typically use a factor rate to determine the cost of funding instead.

What is a factor rate?

A factor rate is a multiplier, expressed as a decimal, that’s applied to the funding amount to determine the total payment amount. The factor rate is determined through an underwriting process, which takes into account the risk associated with providing funding to a business and is typically based on the business’s revenue, growth potential, and other factors.

What’s the best way to calculate the total cost of revenue-based financing?

​​The total cost of a new round of revenue-based financing is equal to the total amount of revenue the customer agrees to remit to Forward (“Amount Sold” in our funding agreement) minus the amount deposited into the customer’s bank account (“Net Purchase Price” in our funding agreement).

In a renewal transaction, a portion of the working capital Forward provides (“Purchase Price” in our funding agreement) is used to pay off the original round of funding and therefore subtracted from the amount that Forward deposits into the business’s bank account (“Net Purchase Price” in our funding agreement).