How Revenue-Based Financing Works

Revenue-based financing is a kind of business loan where the payments vary depending on the income of the business. The repayment period is flexible. If your business’s revenue grows faster, the loan will be paid off quicker, and vice versa. It generally comes with a repayment amount that ranges from 1.5 to 5 times the principal loan.

Unlike equity financing, business owners do not sell equity to the lenders of revenue-based loans. They retain total ownership of and control over the business. Though revenue-based financing companies work more closely with you than traditional banks, they are more hands-off in your business compared to private equity investors.

Revenue-based financing is recommended for small businesses who can show strong monthly recurring revenues (MRR) and have the potential for large, rapid growth. RBF is highly customized which can depend greatly on the structure of your business, revenues, and growth potential. Terms and qualifications may differ from one investor to another.

Revenue-based financing is not ideal for businesses that have irregular monthly income, with steady but slow-paced growth, and those that do not intend to use the funds as growth capital. If your business is not growing fast enough, there are other alternative financing options which you might find more suitable, such as SBA 7(a) Loan, accounts receivable financing, and business line of credit.

When Do Business Owners Seek Revenue-Based Financing?

Small businesses may seek revenue-based financing options during the following:

• Stage of growth where businesses need to hire more personnel
• When a business needs to do a large marketing campaign
• When a company is launching a new product
• When business owners do not want to personally guarantee a loan or sell equity
• When there is a need for bigger capital for an upcoming profitable business plan or expansion

In these situations, business owners preferably choose to get their needs funded through revenue-based financing because their existing profits are not enough to service the debt, but their potential for growth is so large and fast-paced that RBF lenders are willing to accept the risk.

Is Revenue-Based Financing Right for You?

Many businesses may not be large enough for venture capitalists, but they have steady revenue streams that are sustainable and growing in a fast pace. Such businesses need additional growth funding to reach their full potential. RBF lenders find this type of businesses to be good candidates for revenue-based funding.

While some businesses grow fast enough to be qualified for venture capital financing, they may not want to give up equity and give some degree of control to the lender. For this kind of businesses, revenue-based financing is also a good fit.

However, RBF is not always the best option for every business owner. Before you decide to pursue it, your business must meet the following:

• The business must have a high gross margin and established stream of monthly recurring revenue (MRR) from which to draw payments
• Your business must have a relatively stable and established market
• You must have a concrete plan on how to use the funds for growing the business
• If your business is too small for venture capital funding, but still have a steady revenue stream that’s trending upward and be sustainable for a long time
• Your business’s financials are in order. Summary of debts, operating expenses, revenues, and future projections are readily available and accurate.

There are some businesses that have strong recurring revenues but do not have a high personal credit score and may lack assets for collateral to qualify for traditional financing. If you do not qualify for traditional business loans, a revenue-based financing is a good option.