Revenue-based Financing

  

Categories: Banking

With a typical loan, you receive a set amount of money and pay a set amount back in regular installments. At the end of the loan's term, you've returned the principal, plus whatever interest you agreed to.

You borrow $1,000 from your brother for mime classes. You're going to pay him back over the course of a year, with 20% interest (20% interest; yikes...but, to be fair, your brother really hates mimes). You'll end up paying $1,200 by the end of the year, divided by 12 months, or payments of $100 a month. The key here is that you owe a set dollar amount per month. No matter what. Even if you can't earn anything from miming in the subway, you'll owe that $100 each month.

A revenue-based loan doesn't have a set dollar amount. Instead, you pay a predetermined proportion of your revenue to cover the loan. So...you don't promise your brother you'll pay $100 a month. Instead, you'll pay him back 25% of any money you earn from miming. If you work a street corner and get $12 thrown into your hat at the end of a performance, you'll hand over $3 to your brother as partial payment for the loan.

Revenue-based financing is helpful for growing businesses in cases where it isn't clear what a manageable debt load would be. The payments might start off small, when revenues are small, and get bigger as the company grows and is better able to handle high payments.

Some student loans are moving toward this model as well. Instead of a flat amount, the loan collects a certain percentage of income from the former student for a set period of time.

Related or Semi-related Video

Finance: What is the Student Loan Crisis...24 Views

00:00

Finance allah shmoop what is the student loan crisis Well

00:07

simply put more and more and more students have no

00:10

hope of paying back the loans they've borrowed to go

00:14

to college Pick a middle of the road priced university

00:17

good school but state money is fast evaporating so tuition

00:21

and other costs are midway to that of the elite

00:24

private institutions like harvard and stanford On those guys tuition

00:28

twenty grand a year times for room and board Fifteen

00:30

grand a year times four books travel another five grand

00:34

a year times for two green unnecessarily priceless add it

00:38

all up and the total cost to go to a

00:40

middle of the road price university these days all in

00:43

while somewhere around one hundred and sixty grand ouch Some

00:46

of the money can be paid back via summer work

00:48

but it's not easy to find those jobs anymore right

00:51

Certainly in california and a lot of students grumpily have

00:54

tto live in their old rooms back with parents desperately

00:58

hustling artisanal toothbrushes on etsy or moonlighting as a driver

01:02

for uber or lift if you like tips But let's

01:05

say ten grand gets paid back through summer work each

01:08

Summer the interest cost on student loans is high Yeah

01:11

Why Well students or a bad risk How would you

01:13

like to loan money to a student Tons of them

01:16

don't pay back the loans they promised to pay back

01:18

when they signed the paperwork taking them out in the

01:21

first place Five percent interest rate ten percent Twenty percent

01:24

what's the right number Yeah who knows Well all that's

01:26

clear is that some very large number of student loans

01:30

will default and then cost a fortune in lawyer bills

01:33

to collect if they ever get collected at all How

01:36

would you feel being the bank who loaned all those

01:39

bad loans to people who majored in french literature and

01:42

couldn't get a job Well is this fair to the

01:44

non dead beat students who actually did pay back the

01:47

loans they took out They're not responsible for those students

01:51

who were unable to find gainful employment in their field

01:53

study or those who are teo you know preoccupied even

01:57

bother paying loans back in the first place Regardless all

02:00

the goody goodies air left the riding the same skyrocketing

02:03

interest rates is everyone else Why Because you have to

02:06

Charge the non deadbeats mohr interest to pay for the

02:10

deadbeats who didn't pay back their loans Is that fair

02:12

No not at all Is it really life You bet

02:15

isn't that one of the first lessons they teach you

02:17

in college that life isn't fair Well so figure ten

02:21

percent on student loans and here's where things get brutal

02:24

ten percent interest Ah history and english major graduates from

02:28

whatever university with one hundred fifty grand in debt just

02:31

saying they owe fifteen grand a year just in interest

02:34

and the loan packages require them to pay down the

02:36

loan and ten grand a year because they gotta get

02:39

their principal back at some point bringing their total annual

02:42

repayment to twenty five thousand dollars so that after fifteen

02:45

years the loan companies can finally be paid off and

02:48

presumably loan the money to some other deserving student But

02:52

here's Job reality 10:14 history and english majors and we

02:56

know this here It's come up because way hire them

02:59

well Other than its mup there are almost no jobs

03:02

for history and english majors today other than driving uber

03:06

or being a barista may be bartending or you know

03:09

convincing hotties to pay your rent by quoting shakespeare about

03:13

that not a real job and no union and all

03:15

that is said you know until those jobs were taken

03:18

over by driverless cars and robots and artificially intelligent computers

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pitching woo for the shakespeare quote thing and the relatively

03:26

few jobs that do exist don't exactly pay a ton

03:29

of money like think forty grand a year for starters

03:31

So on forty grand you'll pay say make grand in

03:34

taxes and other government fees That leaves you about thirty

03:37

two thousand dollars toe live on and to pay off

03:39

your loans but you're one you owe twenty five grand

03:42

on your loans Fifteen is interest which is not tax

03:45

deductible by the way and ten grand is in principle

03:48

Pay down So that leaves you seven thousand bucks toe

03:51

live on Was that what you spent on haircuts Clothing

03:54

in car insurance alone last year What about eating Is

03:57

that optional How about rent and like anything else Yeah

04:00

you can't afford it So hopefully your parents haven't rented

04:03

out your room yet So why is this thing called

04:06

a crisis Haven't you been listening Because loans of magnitude

04:09

Have continued to flow out of the various coffers that

04:12

loan money to students and the ability to repay those

04:15

loans is getting worse and worse and worse Well eventually

04:18

the system grinds to a halt with massive declines in

04:21

loans made and then what happens Riots What happens when

04:25

students air simply denied the ability to go to college

04:28

altogether What will they do Demand colleges drop tuition costs

04:33

with colleges care colleges are going bankrupt too by the

04:35

way and be nice if they could drop tuition costs

04:38

But other than the top forty or fifty colleges around

04:40

the country Well most schools of higher learning or just

04:43

barely scraping by many you're committed to very high fixed

04:47

recurring costs in the form of tenured professors they and

04:51

not fire expensive building and land maintenance and insurance for

04:55

you know creative student activity and so on someone and

04:58

so on It all adds up such that tuition needs

05:01

to remain high just to pay those bills and keep

05:03

going Could the government step in and just like big

05:06

mama pay all the bills Well your feelings about this

05:09

issue will vary with your political alignment but that still

05:12

doesn't solve the issue of rising costs which will keep

05:15

on getting higher and higher And no matter who's footing

05:17

the bill and why's it fair for the government to

05:20

take money from high earners and give itto low earners

05:23

for something like college that has unclear financial payback Is

05:26

that fair What's our solution but we don't have one

05:29

but it's not how shmoop rolls Our only advice is

05:31

think long and hard when picking a college major and

05:34

taking loans out for school That means keeping your hands

05:37

off ebay and amazon and keeping your nose in the

05:39

books and look really hard at majoring in engineering or

05:42

something Next time you meet a french literature major foreign 00:05:46.295 --> [endTime] coffee for you at starbucks

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