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.

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Finance: What are Payday Loans?25 Views

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finance a la shmoop what are payday loans well this you want to stay away

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from payday loans if you are so strapped for cash [girl gives out payday candy bar]

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that you need to borrow money to pay the rent and you only have the promise of [hand takes money and leave I.O.U. sticky note]

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your future paycheck to borrow against well something has clearly gone wrong [girl looking through papers]

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along the way and you shouldn't trust the snazzy-looking television [TV add for loans]

00:27

commercials you're seeing out there a payday loan is a loan using the promise

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of delivery of cash on your payday cheque as collateral and for most

00:36

companies loaning money on payday this is an extremely profitable business

00:41

because they quote only charge you 2% unquote for the loan but let's do the

00:47

math you're getting the cash two weeks early and last time we looked at a

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calendar there were 52 weeks in a year or 26 bimonthly pay periods so if

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they're charging you 2% to lend you money for one of those bimonthly pay

01:02

periods well their annualized rate that they're charging you for lending you

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that money well that's 52 percent a year right 26 times 2% it's 52 percent a year

01:14

even the worst credit cards charge dramatically less than this rate of

01:18

interest so how do payday loan places get away with such high rent on your

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hard-earned money well if you have to borrow money in this form with such

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urgency well you're likely a very bad credit [woman sends man out to pay grandma]

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risk and the perceived odds of you simply vanishing are well they're high [man gets into car with suitcase]

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and the odds you are financially unsophisticated are almost by definition

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certain because if you did do the math you get even an expensive credit card to

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float you the thousand bucks or whatever your paycheck was or five hundred

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dollars for that half month period to just get by until the next month right

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so if you ever find yourself needing a payday loan let's hope you can work a

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few long weekends saving enough money so that you don't need these things anymore [man working on computer]

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and next time well you know what they say stay in school [school kids collaborating on project]

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