As the Latino owner of a minority-certified small business, I know how challenging it can be to make ends meet. Even successful companies face occasional cash crunches, and access to capital eludes many entrepreneurs like me. It’s therefore critical that small business owners know their options.
Revenue-based financing (RBF) is a flexible solution that provides business owners upfront capital in exchange for a portion of future revenue, collected as a percentage of monthly earnings until paid in full. In other words, if a business’ revenue drops or halts completely, so does its obligation to remit payments for that month.
Take Saul Robles, owner of Fiesta Tequila Bar & Grill in Rockford, Ill. After learning that traditional bank loans were not viable for his business, Robles turned to RBF to expand his company. What’s more, when his restaurant experienced downturns in revenues, he felt comfort in knowing that RBF offered him the right to have his business’ payments reduced, thereby keeping the restaurant afloat. Robles’ story is a testament to how the RBF product can be a game-changer for small businesses, offering infusions of much-needed capital, often saving them from the brink of closure.
NEW LEGISLATION AND ONGOING CHALLENGES
As this lesser-known product gains popularity, hundreds of thousands of small businesses nationwide have benefitted from flexible payment obligations that shift with a business’ revenue flow. However, as with any industry, an unfortunate emergence of bad actors was inevitable, leading to legislative efforts to impose broad regulations on the RBF industry.
Ethical RBF providers welcome many of these proposed laws, as they help “clean out” any bad actors from the industry. Unfortunately, however, some of these legislative efforts have improperly lumped ethical RBF companies with unethical financers, threatening to eliminate this vital source of capital for small businesses. This can push reputable firms out of the market, amplifying the presence of unethical options and negatively impacting the broader economy. The solution? Targeted regulation and a deeper understanding of the RBF industry as a whole.
Understanding the distinction between unethical and ethical revenue-based financing is crucial for supporting targeted regulation. Ethical RBF companies offer a much-needed product to small and midsize businesses, especially those unable to secure “traditional” capital, such as that from banks or federal funding, which has become increasingly challenging.
Minority-owned businesses are particularly vulnerable to limited access to capital, with statistically half as much likelihood of securing financing approval compared to their white counterparts.
RBF offers a solution with flexible payment models that adapt according to a business’ revenue flow and ensure that repayment terms are manageable even during financial hardship. This benefit is a critical offering for customers with fluctuating revenue streams.
Unethical funders, on the other hand, employ aggressive payment tactics with no flexibility for businesses facing difficulties and, at times, even resort to threats and harassment immediately after missed payments. These funders typically lack accreditation, have hidden fees and unclear terms, and do not comply with regulatory or industry standards.
THE NEED FOR TARGETED LEGISLATIVE EFFORTS
As we consider the landscape of small business financing, it is crucial to recognize the detrimental impact of “one-size-fits-all” legislation that does not consider the unique characteristics of RBF.
For example, competitors of the RBF product highlight the behavior of unethical RBF players in attempts to convince legislators to ban RBF or create regulations that would be extraordinarily difficult to implement—perhaps so much so that it would cause even ethical RBF providers to close.
Similarly, competitors may push for nonsensical regulations that misleadingly steer customers away from RBF. For instance, organizations backed by competitors have successfully passed legislation mandating the disclosure of APR on financing products, although RBF has no set term and carries no interest. Enforcing APR disclosure on RBF products would negatively affect customers, confusing small businesses into believing they are making an apples-to-apples comparison between a loan product and an RBF product. Legislators would do well to inquire into the motives behind entities who claim to be acting in the interest of small businesses when, in fact, they may be attempting to gain a competitive edge over the RBF product.
Ethical RBF offers a solution to hundreds of thousands of small businesses, with transparent and flexible payment models that ensure manageable payment terms. With access to capital a leading concern among minority businesses, ethical RBF often becomes a lifeline for them.
I call upon our legislators, chambers of commerce, and stakeholders to support ethical RBF companies through targeted regulations, which can address predatory practices while preserving this essential financial service.
An award-winning marketing executive, Mike Valdes-Fauli is Chief Operating Officer of Chemistry and President of its multicultural division, Chemistry Cultura. He runs one of the fastest-growing multicultural agencies in the country, with clients including Carnival Cruise Line, Comcast, Heineken, NFL, TelevisaUnivision and the U.S. Hispanic Chamber of Commerce.
