If you are an e-commerce player, a SaaS company or a marketplace seller:
Your business is growing fast, and you want to take it to the next level. Discover here what to look for when first signing a short-term loan sheet.
You’ve probably thought about going to see your bank and asking for credit, but you soon realized it was not a very satisfying option. Traditional banks are still not very comfortable with financing digital startups, mostly for two reasons:
Maybe you’ve heard or read about Revenue Based Financing, which offers a new type of loan for SaaS or e-commerce players. Because they are data-driven, RBF companies will track your activity in order to assess your future growth and repayment capacity. Instead of assessing your past, RBF startups will predict your future. They will allow you to access short-term loans instantly with either fixed or variable repayment terms.
Revenue Based Financing has many benefits: there is no dilution, the process is quick and frictionless. At Silvr for example, you get the money wired to your bank account just one week after signing up to the platform.
But before signing the short-term loan contract, you may wonder what’s inside. What are the most important aspects to look at before accepting the loan offer? What are some best practices and mistakes to avoid?
It may seem obvious but this is the first thing you should look at. In most cases, it usually equals to 10% of your last month's turnover.
It should be carefully related to what your company needs, depending on your turnover. If you ask for more than what your company needs to keep on growing in a sustainable way, then you’ll probably have trouble repaying your loan. In the end, it could endanger the viability of your business.
The good news is that when you apply for a short-term loan on Silvr’s platform, we help you define what financing amount is the safest for you to start with. How do we do that? By connecting to your PSP (payment service provider), CMS (content management system), Prestashop and Google Analytics, we’re able to predict your growth and better calculate what you need in order to fuel your growth in a risk-free way.
When it comes to repayment, there are two main options you can choose: either you want to make fixed repayments (i.e. repaying the same amount each week, exactly like you would do with a traditional loan), or you want to repay a given percent of your revenue (this is what we call the Revenue Based Financing mode). In both cases, the amount you repay will be the same - but with RBF mode you will have greater flexibility because your repayment period can be longer if it needs to.
Revenue Based Financing is truly innovative because instead of repaying a fixed amount every month, you can choose to repay a percentage of your revenue. RBF repayment is tied to your business's revenue, which means that payments will be larger during high-revenue periods and smaller during low-revenue periods. From one month to another, what you repay is not going to be the same. This is called the “payback percent”.
Payback percent allows you to repay small amounts after a week of weak sales, and repay big amounts if you had an incredible week. That way, your business is barely going to get asphyxiated if there is ever a month when you struggle with only a few orders. With the same logic, in order to prevent your best week from killing your business, the maximum amount you can repay is capped to 25% of your revenue.
Simply put, the commission is how Revenue Based Financing platforms pay themselves. It’s the cost of financing your business. That said, it is important to note that the cost of RBF can be difficult to compare to other forms of financing because it is not structured as a traditional loan.
What do we mean by ‘commission’?
A commission is very different from an interest rate. Let’s say the commission equals to 5% of your loan. If you borrow 100k€, then your commission equals to 5000€. It means that the total cost of your loan will be 5000€ - no more, no less. Whatever amount you repay each month - and even if you extend your repayment period to a year - in the end, you will have repaid 105k€ in total.
How does it differ from other types of loans?
When asking for a traditional loan, the bank gives you an interest rate - let’s say 2%. It means that each month, you will repay a fixed amount to the bank. This amount is comprised of 2 things:
That’s why when you start repaying for your loan, a great part of what you repay is composed of interests - and a small part of the capital itself. The longer you repay the loan, the smaller the remaining capital part becomes and so does the interest part. The bank will also give you a Global Effective Rate which is an annualized fee including all the cost related to the loan.
The GER (Global Effective Rate) is very different from the fixed commission the Revenue Based Financing platforms charge their customers with. Nevertheless, on your RBF contract, you will see an annualized rate too. What does that mean?
For legal reasons, loan providers have to display the Global Effective Rate, even if what they charge customers is not an interest rate but rather a commission. These GER calculations are given for information purposes, taking into account the specificity of the loan and its repayment terms. That is why, the commission you owe the platform will appear bigger than you thought in your loan contract, where it is displayed as a percentage. The GER may seem high but it is misleading: you will actually never pay that yearly fee.
Let’s take the same example as above: you subscribed to a 100 000€ loan with a 4 week offset and a repaying period of 12 weeks. The commission is 5%, so in total you will pay 5000€. When annualizing the commission, we get a GER of 24% - which may seem very high! But the effective cost is only 5% of what you borrowed - that is 5000€.
Another major point to bear in mind is that the commission is the only thing you are going to pay to the RBF platform. There is nothing else, the platform takes neither hidden fees nor a warranty on your business - contrary to banks that usually ask for collateral.
Revenue sources are the specific platforms a neolender is using to get an estimation of your future revenue. Using APIs, RBF platforms are able to connect to your Prestashop account, to your CMS (e.g. Wordpress), and to the PSP you’re using (e.g. Stripe) to get a full picture of your order flow. Following the same logic, RBF platforms will connect to your Google Analytics account so that they can see exactly how much traffic your website gets, day after day. Based on this data of the past 6 months or more, a neolender can offer you the most suited lending amount and commission option.
We advise you to read the loan provider’s data policy in order to make sure your business’s data will be handled safely. At Silvr, we just passed ISO 27001, which is an international standard certifying that information is managed securely at all points in the organization.
Using real-time data analysis and AI models, it is possible for loan providers to predict your future growth and anticipate the money you will need to fuel it. Sometimes, you should be aware that the RBF lenders may ask you how you plan to use the funds you were given, and justify those needs. At Silvr, we don’t. As simple as that.
The last term of importance is called the offset. Before getting the money from the RBF platform, you will have to set a number of days or weeks before starting to repay your loan. It can be from one week up to 4 weeks.
The longer the offset is, the more time you have to put your newly acquired loan to work before starting to repay the neolender its money.
That said, if you choose to repay your short-term loan using the Revenue-Based Financing mode, you will have up to 12 months to fully repay the loan. Even if it can sound scary, don’t forget that thanks to the payback percent - if you experience a week with a low level of sales, the amount you will repay will be low as well. That, together with the offset, makes taking a short-term loan a responsible but always a safe commitment.
Now you should be all set with the specificities of short-term loans. If you do have any remaining questions or think that Silvr’s short-term loan could be the right option for you - don’t hesitate to contact us!
Published on
March 27, 2023
By
Manon
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