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Revenue-Based Financing: What It Is and How It Works

By Dock Treece Reviewed By Mike Lucas
By Dock Treece
By Dock Treece Reviewed By Mike Lucas

When experiencing tremendous growth, a business can quickly run out of resources to keep up with increasing demands. The logical next step is to seek funding — and that’s where revenue-based financing can come in handy. 

As a rapidly growing business, you need funding that adapts to your company’s changing needs. Find out whether revenue-based financing is the best option for your business.

What Is Revenue-Based Financing?

Revenue-based financing, also known as royalty-based financing, allows you to pay back loans based on your company’s monthly revenue. 

Unlike a conventional commercial loan with a strict amortization schedule, revenue-based loans don’t have fixed payments each month. Instead, your repayment is entirely dependent on your growth rate and will increase or decrease every month.

Characteristics of Revenue-Based Small Business Loans

According to various lending and financial advisory websites, revenue-based business loans have a broad range, typically starting at $50,000 and going up to $3 million. 

Instead of accruing interest, revenue-based lenders charge a fixed amount for repayment — typically around 1-3 times the amount borrowed. However, some lenders may require 5-7 times the amount borrowed. Payment amounts are agreed upon at signing, usually falling between 2%-8% of your monthly revenue.

Example of How a Revenue-Business Loan Works

Business ABC is seeking $200,000 in capital, and it generates $50,000 in monthly revenue. A lender is willing to approve the business for financing with a repayment of 1.5 times the funding amount the company is seeking. This equates to a total repayment of $300,000. 

The monthly revenue percentage in the financing agreement is 5%. Let’s say Business ABC’s monthly revenue remained unchanged. This would mean the company’s repayment would be 5% x $50,000, or $2,500 per month.

Assuming revenue remained the same throughout, Business ABC would repay the loan in 10 years, or 120 months (i.e., $300,000/$2,500).

Image of a building with an upward trending line graph over it and a stack of coins to the right of it with the words "Revenue-Based Financing" below

What Are the Benefits of Revenue-Based Financing?

There are several positives when it comes to revenue-based financing. If you’re looking for a fast, flexible way to expand your business and other options aren’t available, revenue-based funding may be your best bet.

Repayment Is Flexible

Since the loan repayment is based on your monthly revenue, you can avoid fixed payments that might be too high at any given time. When your revenue increases, so do your payments. If you’ve had a financially challenging month, you won’t be on the hook for more than you brought in.

Funding Can Be Faster

Conventional and venture capital financing can take months to reach your bank account. Revenue-based lenders can provide funding within a few weeks, making them a good choice for those who need cash to fund projects with an immediate timetable.

Keep Your Equity

With revenue-based financing, investors don’t typically take any equity. That’s good for a small business that doesn’t want to dilute its ownership or relinquish control. Also, keep in mind equity financing through venture capitalists and angel investors can be more expensive when compared to revenue-based loans, as these investors often expect a return of 10-20 times their initial investment.

Do you need a loan for your small business?

What Are the Disadvantages of Revenue-Based Financing?

There are some drawbacks to revenue-based financing. Because they’re repaid a bit differently and are targeted at businesses that may not qualify for other options, they come with some riskier terms.

Higher Costs

Conventional business loans use standard interest calculations to determine repayment amounts and give lenders a return on their financing risk. This allows a borrower to potentially reduce some costs by paying down their principal faster. 

Much like a merchant cash advance, revenue-based financing has a set amount that must be repaid no matter what. Depending on your business’s creditworthiness and how long you take to repay your loan, you could end up paying 3 times the amount that you borrow.

Uncertain Repayment Periods

Because repayment is based upon a percentage of your revenue, you have no way of telling exactly when your loan will be paid in full. This could work out great if your business takes off and you pay it off in months. But, it might turn into a burden if it takes years to bring in enough revenue to satisfy the loan.

How Do I Get a Revenue-Based Business Loan?

Since revenue-based financing is considered a niche market, it may be challenging to find a lender. When you do, you need to make sure you have what it takes to qualify for a small business loan based on revenue.

Find the Best Revenue-Based Lender

Banks and other conventional financiers don’t offer these types of loans, so you’ll have to search elsewhere. Indeed, there are revenue-based financing firms out there, and many of them exclusively offer business revenue loans (e.g., Lighter Capital, SaaS Capital).

Ace the Application

Once you’ve found a potential lender, submit an application online that includes both your business and personal information. The lender will ask to see your business’s financial documents (balance sheet, profit-and-loss statement, etc.) and may even look at your personal credit score. 

The lender can connect directly to your bank accounts to verify revenue before determining a suitable loan amount and repayment terms. Be ready to provide 3-12 months of business bank statements, plus a business plan for review.

Image of a building with an upward trending line graph over it and 3 stacks of coins, stacked from shortest to tallest, to the right of it

Demonstrate Growth Potential

Generally, your business must have a gross profit margin of at least 50% to qualify for revenue-based financing. Your business plan should include the strategy you’ll enact to grow that revenue and, therefore, pay back the loan.

Specify How You Will Use Funding

Show a lender how you plan to use the loan. They need assurance the money will be well spent to help your business grow. Present your plan to show how the loan will be used. For example, product launches and marketing campaigns are great indicators of growth.

Consider Lenders You Want to Work With

If you have multiple options, go with the lender that can best help you grow your business — not just the one offering the best deal. Some lenders might even act as mentors, ensuring they recoup their investment by giving you valuable insight. 

If the partnership is mutually beneficial, the repayment process will be smooth and can set you up for an ongoing relationship with the lender.

  • Don’t Cut Off Your Cash Flow

    Do the math. If you can’t afford repayments, revenue-based lending isn’t for you. Make sure your sales and revenue flow is sufficient to sustain your business during your repayment period.

Frequently Asked Questions About Revenue-Based Financing

When Should I Look For Revenue-Based Financing?

The best time to look for revenue-based financing is when your business grows quickly and your credit is strong. You may also qualify for other financing options, but this is when your odds of approval are the best for a revenue-based loan.

What Happens If I Get Revenue-Based Financing and My Revenue Falls?

When you take a revenue-based loan, your monthly payment is structured as a percent of your revenue. If your revenue falls, the amount of your monthly payment will decline as well. However, this may mean that it takes longer to pay back your loan.

Who Should Use Revenue-Based Financing?

Revenue-based loans are best for businesses with substantial monthly revenue and are growing quickly. Though they may not qualify for more cost-effective conventional loans, business owners considering this type of financing should have strong credit.

Get approved for a cash advance based on your revenue.

Learn More

Is a Revenue-Based Financing Structure Right for Your Business?

Revenue-based loans are tailored to the success of your business. The faster your business grows, the quicker you can repay and move on. Your most substantial payments coincide with your most profitable months — which means you’ll have lower payments and, therefore, more breathing room during slower months. 

These loans are best suited for businesses with high gross margins or subscription-based models with consistent, easily forecasted revenue. The most successful of these companies are often software-as-a-service businesses because of their ability to scale quickly. 

However, revenue-based financing could benefit your small business regardless of industry depending on your current situation, such as the following.

Businesses Too Small for Venture Capitalists

Some small businesses are too small to draw the attention of venture capitalists. Revenue-based lenders, however, usually aren’t concerned with the massive returns that venture-capital investors chase.

A revenue-based loan could be the right fit if your business has a consistent revenue stream and a sustainable model built for modest growth.

Business Owners Looking to Keep Control

If your business has growth potential and has been propositioned by venture capitalists, you might still want to shy away from that type of financing. You’ve worked hard to get your business where it’s at and may not want to risk sacrificing your vision or grant control to another entity. 

Revenue-based loans are a potential solution. These loans are repaid directly to a lender, one who doesn’t require the release of an equity stake in your business that venture capitalists demand.

Businesses Unable to Secure Conventional Financing

If you don’t qualify for conventional financing despite generating stable, recurring revenue, revenue-based financing might work for you. 

Some lenders are hesitant to offer standard funding products if a company doesn’t show a long, strong, positive history of creditworthiness. 

Fortunately, revenue-based financing creates many advantages over other funding options if you find yourself in this situation.

What Are My Next Steps?

By now, you should have all the information you need to begin to determine whether revenue-based financing works for your small business. 

If you’re achieving consistent revenue and have plenty of room for growth, this type of financing could be the perfect fit for you.

If you’re unsure where your business is headed or the terms just don’t fit what you’re comfortable with, take a step back and consider other options.

Dock Treece
Dock David Treece is a finance analyst and contributing editor at Fast Capital 360 focusing on personal and small business finance. Dock is a former securities broker and investment advisor and brings more than 10 years of experience in investments and finance to Fast Capital 360. Dock has been featured by CNBC, Forbes and Bloomberg. He lives with his wife in North Carolina.
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