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In the new economy it can be very difficult or impossible for a small business owner or entrepreneur to find capital to support the development of new ideas. Historically, small businesses and entrepreneurs have sought capital through "Angel' investors and lending institutions and these options are increasingly unavailable to even well established businesses. The revenue-based finance model, sometimes called the royalty-based finance model (RBF), is a financing plan that was introduced over 50 years ago and is gaining popularity today. The RBF model provides unique benefits to both the small business and the investor.
The RBF model is a non-dilutive system in that the small business owner does not lose any ownership in the company, this factor tends to be the most important and desirable feature of the RBF funding system to small business owners. Additionally, the investors payout is capped to a specific amount that is paid out of the revenue the company earns within a specified time period. Business owners benefit by receiving investment dollars to build their business without losing ownership and investors benefit by receiving payouts as soon as revenue is made by the business. The investor has purchased the rights to the revenue earned by the small business, but they have not purchased any other ownership of the business. The terms of the RBF model are typically negotiated to allow some time for revenue to accrue before payouts need to be made, and typically there is a time period limitation and a payout limitation that is included in the negotiated terms.
This model is now used by many investment companies across the nation including even local and state government agencies. Notably, not all small businesses or investors will benefit by using this model. Investors who agree to RBF terms need to accept the 'capped' earning potential of the investment. Businesses with low profit margins and limited flexibility on pricing should careful negotiate the terms of any RBF financing plan to make sure their revenue stream can support a regular deduction and payout to investors.
The RBF model can give a revenue stream for any business and may offer a mechanism for funding both well established business institutions and upstarts, equally.
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