Revenue-Based Financing

Revenue-based financing is a financing product where the loan is repaid based on a company's future revenue.

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OVERVIEW

Revenue-based financing (RBF) is a good alternative to venture capital and angel investments. RBF is a way to raise business capital from investors who receive a regular share of the business revenues until a predetermined amount has been repaid. It is a kind of business loan where repayments are based on your business’s revenues instead of a fixed amount.

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Small Business Financing

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.

Revenue-Based Financing Qualifications

Lenders of revenue-based financing focus on both your monthly income and your business’s potential to grow faster. The business should ideally use the funds as growth capital, like for product development, new hiring, sales and marketing initiatives, and other business plans to grow your business to at least 10 times its current revenues.

The typical minimum qualification requirements for revenue-based financing include the following:

  • $15,000 to $100,000 minimum required monthly revenue
  • At least 50% or more required gross margin

However, qualification requirements, like the costs and terms, may vary greatly from borrower to borrower and lender to lender. There are some documentation requirements that the borrowers need to present, such as the following:

  • Basic personal and business information
  • Bank statements (usually for the recent 3 to 12 months)
  • Personal credit check
  • Business plan and/or investor deck, which will help determine how much you can borrow and the loan terms

The application may be submitted online. You need to provide your personal and business information. The lender will then verify your revenue directly from your bank through your bank statements. As soon as verified, the underwriting process will follow to set the loan amount and payment terms.

Revenue-Based Financing Costs and Terms

The costs and terms for revenue-based financing are highly customized between borrowers and investors. This means that everyone may do it differently. Specifically, you should expect to find the following range of costs and terms.

Typical Revenue-Based Financing Costs & Terms

Loan Amount$50,000 to $1,000,000
Payment Terms3% to 8% of gross monthly revenue (paid monthly)
Interest Rate18% to 30%
Total Cost of Capital1.5x to 5x the original amount borrowed
Turnaround Time for Funding3 to 4 weeks at the average

Bottom Line

Revenue-based financing is a great option to raise capital funds from investors. Businesses who have the potential for rapid growth and high profits are a good fit for RBF. Because RBF is repaid based on a percentage of your revenues rather than a fixed amount, you can pay for the loan and still able to manage your cash flow.

The Details:


max-loan-amountMaximum Loan Amount
Varies


loan-termTypical Loan Term
Based on revenue


interest-ratesTypical Interest Rates
18% - 30%


speedSpeed
3 - 4 weeks



Down-PaymentDown Payment?
Not Required


CollateralCollateral
May be required


Personal-GuaranteePersonal Guarantee?
Yes

Have a question?

Pros


small business loansIt has an incredibly flexible repayment options.

small business loansLess documentation requirements and easier application process.

small business loans

You pay the loan from your income percentage, so you won’t have to worry about not having income left after paying your debt amortization.

small business loansUnlike venture capital funding, you do not need to give up any equity for RBF.

small business loansYou still have full business control as providers never take control on your business during repayment.

Cons


small business loansGenerally more expensive than traditional loans.

small business loans

Because repayment is based on your business’s revenues, there is a possibility that repayment can extend longer than you intend to if your business is not able to meet its income projections timely.

 

 

How to Apply

how-to-apply1Answer Simple Questions
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Additional Resources

Understand the difference between business loans and lines of credit
Click here!

Interested in a home equity line of credit or home equity loan?
Click here!

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