Small-town and low-income business owners frequently lack the personal credit history and assets necessary to obtain the bank loans and investment capital they require to expand their enterprises.

As a cost-effective solution for underrepresented business owners in the U.S., revenue-based financing — where investors contribute cash in exchange for a percentage of revenue — has come to be promoted by foundations and social impact investing organizations. It's a strategy that can forge a partnership between a firm that obtains money and its investors since both benefit from the business' success.

Investing linked to revenue is also more friendly to entrepreneurs by giving them “an opportunity to gain financing without having to give up ownership,” which can happen with private-equity or venture financing, said Chat Reynders, CEO of Reynders, McVeigh Capital Management, a Boston-based wealth management firm, in an interview with Barron's magazine.

Source: Barron's