Revenue-Based Lending
In the ever-evolving financial landscape, one concept that has gained significant traction is bringing together banks and fintech companies: revenue-based lending. This innovative approach to financing is reshaping how Small and Medium Enterprises (SMEs) apply for an access capital, and it's largely thanks to the rise of fintech companies ready to smoothly integrate their platforms with traditional banking institutions.
What is Revenue-Based Lending?
Revenue-based lending is a method of raising capital for a business in which investors provide funds for unsecured loans based on a business's historical revenue and future cash flow projections — rather than collateral.
How Does It Work?
By using APIs to connect directly to a business’s active management accounts, bank account data, and/or payment processing systems, lenders can automatically and instantly assess the business's ability to repay. With this reliable insight, they can then tailor funding options like principle, interest, fees, and timing, accordingly. Repayments can even be dynamic and flexible, directly proportional to the business's income. This allows for terms, for example, wherein if sales fall off in one month, the repayment amount is reduced. Conversely, if sales increase, so do the repayments. In short, this reimagined process replaces actual collateral with data as criteria to define risk and support or reject an application.
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Advantages for Borrowers and Lenders
For borrowers, particularly SMEs, revenue-based business loans provide an alternative means of funding that doesn't require giving up equity or making fixed monthly payments, and the most innovative lending platforms can also accelerate the process as compared to traditional, manual, paper-work-based loans. In addition, this flexibility can be particularly beneficial for businesses with fluctuating revenues due to seasonality or unexpected changes.
For lenders, revenue-based lending allows them to diversify their portfolio, keep existing customers, and mitigate risk. Since repayments are tied to revenue, lenders are more likely to recoup their investment if the business performs well. Finally, as the analysis is programmatic and automated, lenders dramatically reduce paperwork and the time and cost it takes to process it. Perhaps most intriguing is the option to experiment with various lending rules and criteria to maximise successful loans and to identify niche markets with specific characteristics.
The Role of Fintech Companies
Traditional banks often struggle with providing revenue-based financing solutions due to their reliance on legacy systems and processes. Even those working to foster a culture of innovation cannot necessarily divert significant resources from each department to build and support a new technology-driven product. This is where fintech companies come in. Leveraging advanced technologies like AI and big data, fintech companies can assess hundreds of data points about borrowers' financial habits and make informed lending decisions faster. As an added bonus, they generally emphasise an all-digital, intuitive, user-centric approach to the customer journey.
It is no exaggeration to state that fintech companies are revolutionising the lending industry by helping lenders provide quick access to capital and making the loan application process more efficient. They are also expanding accessibility and eligibility for traditionally underserved businesses by providing alternative means of funding.
Conclusion
Revenue-based lending represents a significant shift in SME financing. It offers a flexible and efficient way for businesses to raise capital while providing lenders with a potentially profitable investment opportunity. As fintech companies continue to innovate and disrupt traditional banking models, revenue-based lending is likely to become an increasingly popular option for SMEs seeking funding.