Running a business requires a significant investment of time, effort, and money. From building a website to sourcing products, marketing, and customer service, there are numerous expenses involved in every step of the process. For entrepreneurs who are just starting out, or those looking to expand, finding the right funding option can be a challenging task.
One alternative funding option that has gained popularity in recent years is revenue-based finance (RBF). Unlike traditional funding options that rely on collateral, credit scores, and personal guarantees, RBF offers funding based on a percentage of a business's future revenue.
In this step-by-step guide, we will explore the various funding options available to businesses and provide tips on how to evaluate and compare them. By the end of this guide, you will have a comprehensive understanding of how to weigh up your funding options and choose the right one for your business.
Step 1: Understand Your Funding Needs
Before deciding on a funding option, it's essential to understand the specific funding needs. These needs will vary depending on the stage of your business and the type of products or services you offer.
For example, if you're just starting, you may need funding to cover expenses such as website design, product sourcing, and initial marketing costs. Alternatively, if you're looking to expand, you may need funding to purchase additional inventory coming up to busier periods or invest in new marketing channels.
To get a better understanding of your funding needs, consider the following expenses:
- Website design and development
- Product sourcing and inventory
- Marketing and advertising
- Shipping and fulfillment
- Customer service
- Legal and accounting fees
- Equipment and technology
By breaking down your expenses, you can determine how much funding you need and what type of funding option would be most suitable for your business. It's essential to have a clear understanding of your funding needs before moving on to the next step, as it will help you evaluate the suitability of different funding options.
Step 2: Explore Traditional Funding Options
Once you have a clear understanding of your funding needs, it's time to explore the various traditional funding options available. Some of the most common options include bank loans and credit cards:
Bank Loans: Bank loans are a traditional funding option for small businesses, including e-commerce businesses. These loans typically require collateral, a good credit score, and a well-established business plan. While bank loans offer competitive interest rates, they can be difficult to secure, especially for newer businesses.
Credit Cards Credit cards can be a useful source of funding for small expenses, such as advertising or equipment. However, relying on credit cards for significant expenses can lead to high-interest rates and debt.
When considering traditional funding options, it's important to weigh the pros and cons of each option and assess whether it's the right fit for your business. Traditional funding options often require collateral or a strong credit score, which may not be feasible for newer eCommerce businesses.
Let’s explore alternative funding options, including revenue-based finance, which has become increasingly popular.
Step 3: Consider Alternative Funding Options
Revenue-Based Finance (RBF):
Revenue-based finance (RBF) is a type of alternative funding option that has become increasingly popular in recent years. RBF offers businesses funding based on a percentage of future revenue. Unlike traditional funding options, RBF does not require collateral or a good credit score. Instead, funding is based on the potential growth and revenue of the business. RBF offers flexible repayment terms, which allows businesses to pay back the funding based on their revenue stream, rather than a set repayment schedule.
For example, at Outfund, you can apply for funding ranging from £10K to £10M and have your tailored offer to review within 48 hours and decide which offer best suits your business. When it comes to repayments, this can be done via a flexible revenue share as your daily sales come in. That way, if revenues slow, so do your repayments. Or if you prefer predictable repayments, you can choose to have a fixed repayments option as well.
When considering alternative funding options, it's important to assess the suitability of each option for your business. RBF offers flexible repayment terms and does not require collateral or a good credit score, making it a popular option. However, it's essential to understand the terms and conditions of the funding option before proceeding. In the next section, we'll explore how to evaluate the various funding options available.
Step 4: Evaluate the Funding Options
Now that you have a clear understanding of your funding needs and have explored the various funding options available, it's time to evaluate each option. One way to evaluate the options is by creating a matrix that compares each funding option based on criteria such as interest rates, repayment terms, and funding amount.
Here's an example of what the matrix might look like:
|Funding Option||Rates\Fees||Repayment Terms||Funding Amount|
|Bank Loan||4-10%||3-10 years||Up to 500,000|
|Credit Card||12-20%||Varies||Up to 50,000|
|Outfund||5-10%||Based on revenue||Up to 5,000,000|
By comparing each funding option, you can assess which option is the most suitable for your business. In addition to the matrix, it's essential to consider other factors such as the application process, the required documentation, and the time it takes to receive funding.
When evaluating the funding options, it's also important to consider the potential impact on your business. Some funding options, such as RBF, may allow you to retain more control over your business and enable you to maintain your equity position. On the other hand, traditional funding options may require you to give up a portion of your business in exchange for funding.
In the next step, we'll explore how to apply for funding and provide tips on how to prepare a strong funding application
Step 5: Apply for Funding
Once you have evaluated the various funding options and have chosen the most suitable option, it's time to apply for funding. The application process will vary depending on the funding option you choose. Here are some general tips to help you prepare a strong funding application:
Prepare a clear and concise business plan: A clear and concise business plan is essential when applying for funding. Your business plan should outline your business goals, revenue projections, and marketing strategies. It's essential to provide a detailed breakdown of how you plan to use the funding.
Gather the required documentation: Depending on the funding option you choose, you may be required to provide various documents such as financial statements, tax returns, and personal financial state
Have a strong credit profile: One of the biggest advantages of RBF is that it does not require a strong credit score. This is in direct contrast to traditional funding options such as bank loans and credit cards.
Be prepared to answer questions: During the application process, you may be asked to provide additional information or answer questions about your business. It's essential to be prepared and provide clear and concise answers.
By following these tips, you can increase your chances of securing funding. Remember to read the terms and conditions of the funding option carefully before accepting the funding.
Case Study: Lemonade Dolls got £50,000 in RBF to grow their business
Lemonade Dolls is a UK-based underwear subscription brand all about female empowerment. In order to scale the business and grow its community, Lemonade Dolls needed funding to develop the technology for their subscription programme by increasing their marketing reach.
By choosing RBF, Lemonade Dolls was able to do this without giving up valuable equity in the business.
Within 24 hours, Outfund was able to make the company an offer of £50,000 after a quick application process and Lemon Fuller, Lemonade Doll’s founder, was happy to accept.
“RBF is a great way to get the funding you need without parting with any more equity!”
Since accessing its funding, Lemonade Dolls has increased its marketing budget and managed to 4X subscriptions.
Access RBF today to grow your business
Securing funding for your business can be challenging, but by following these steps, you can make an informed decision about which funding option is the most suitable for your business.
Revenue-based finance offers a flexible and accessible funding option, allowing them to grow and expand without giving up control of their business.
However, it's important to evaluate all the funding options available and choose the one that best fits your business needs. With careful planning and preparation, you can secure the funding you need to take your business to the next level.
If you’d like to learn more about how RBF can help your business, reach out to our team at Outfund today to set up a call.