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"},"editorialNote":"Many or all of the products featured here are from our partners who compensate us. This may influence which products we write about and where and how the product appears on the page. However, this does not influence our evaluations. Our opinions are our own.","post":{"canonical_url":"/business-loans/guides/revenue-based-financing","databaseId":40682,"id":"Y3VzdG9tX2xvYW46NDA2ODI=","date":"2020-06-14T14:51:40","modifiedGmt":"2020-10-09T00:42:19","title":"Revenue-Based Financing: Everything You Need to Know","uri":"is-revenue-based-financing-right-for-you-heres-what-you-need-to-know","status":"publish","slug":"is-revenue-based-financing-right-for-you-heres-what-you-need-to-know","link":"https://www.fundera.com/blog/custom_loan/is-revenue-based-financing-right-for-you-heres-what-you-need-to-know","guid":"https://www.fundera.com/blog/?post_type=custom_loan&p=40682","seo":{"metaDesc":"With revenue-based financing, businesses secure capital in exchange for a set percentage of their future revenues. Learn more in our guide.","metaKeywords":"","metaRobotsNoindex":"","metaRobotsNofollow":"","title":"Revenue-Based Financing: The Ultimate Guide | Fundera","opengraphImage":null,"twitterDescription":"","twitterTitle":"","twitterImage":null},"categories":{"nodes":[]},"fdsTableOfContents":{"tocheader":null,"enabled":null},"acfCustomLoanPage":{"categories":{"nodes":[{"slug":"/business-loans/","name":"Business Loans"}]},"pageSection":[{"pageSection":{"header":"What Is Revenue-Based Financing?","components":[{"fieldGroupName":"CustomLoanPost_Acfcustomloanpage_pageSection_PageSection_Components_Paragraph","content":"Revenue-based financing, sometimes referred to as royalty-based financing (or RBF), is a type of business funding in which a company secures capital from investors—and these investors receive a certain percentage of the business’s future monthly revenues in exchange for their initial investment.
\nThe investor or financing firm will claim the agreed-upon monthly revenue percentage until a predetermined amount has been paid.
\nUnlike traditional business loans, therefore, revenue-based financing is often considered a mix of debt and equity financing. This funding method is popular with startup businesses, particularly those in the technology or software-as-a-service (SaaS) space.
\nWith this revenue-based financing definition in mind, let’s break down how this type of funding works in greater detail.
\nAs we mentioned above, revenue-based financing is typically considered a mix of debt and equity financing, however, it’s distinct from these two funding branches in a few ways.
\nFirst, this type of financing is similar to equity financing in that the capital you receive comes from investors or a financing firm, like a venture capital firm (VC), as opposed to a small business lender, like a bank. Unlike equity financing, however, the investors that provide revenue-based financing have no ownership in the business.
\nThis being said, on the other hand, revenue-based financing is similar to debt financing in that you’re receiving an advance of capital that you’ll need to pay back through a series of payments. Unlike debt financing though, you do not pay interest on an outstanding balance with RBF, nor do you follow a schedule of fixed payments
\nInstead, your payments are based on your incoming sales revenues—in this way, making revenue-based financing akin to a merchant cash advance.
\nIn addition, because revenue-based financing comes from investors or financing firms, you’ll find that there are fewer regulations in comparison to traditional debt financing. To this point, RBF usually doesn’t require physical collateral or a personal guarantee.
\nMoreover, an investor or firm’s decision to offer capital to your business will be based on a number of factors, but those that are not necessarily the same as traditional business loan requirements.
\n","header":null,"button":{"link":null,"text":null}},{"fieldGroupName":"CustomLoanPost_Acfcustomloanpage_pageSection_PageSection_Components_Paragraph","content":"Overall, revenue-based financing can be structured in a few ways.
\nThis being said, the most common revenue-based financing structure is akin to a term loan—in that you receive a set sum of capital and repay that capital (with interest) over time.
\nHowever, unlike a term loan, you’ll often see that with RBF, the full amount of capital is not advanced upfront. Instead, the business can draw from their “loan amount” over a number of years—and this way, they’re not accruing interest until they need the capital. In this way, revenue-based financing can be similar to a business line of credit.
\nWith this in mind, the differences in revenue-based financing structure often stem from how payments are made. Depending on your agreement with the investor or financing firm, you might make payments until:
\nOf these three structures, you’ll probably see the first option most frequently.
\nOverall, payments on revenue-based financing are based on a fixed percentage of revenue (usually 1% to 3%, but as high as 8%). These payments, including both principal and interest, are made on a monthly basis, and vary based on your sales—the higher your sales for the previous month, the larger payment you’ll make.
\nTherefore, unlike a business term loan, revenue-based financing doesn’t have repayment terms as we typically think of them—the time it takes you to repay the initial investment will vary, like the payments themselves. Generally, however, the “terms” will range from three to five years.
\n","header":"Revenue-Based Financing Structure","button":{"link":null,"text":null}},{"fieldGroupName":"CustomLoanPost_Acfcustomloanpage_pageSection_PageSection_Components_Paragraph","content":"As you can see, revenue-based financing can be complex, especially as it compares to more common forms of financing.
\nTo get a better sense of how this type of financing works, therefore, let’s break down an example:
\nLet’s say that you have a startup business that is looking for $100,000 in capital. Your sales revenue generally comes in at about $25,000 per month.
\nYou find an investment firm that’s willing to offer you this funding in a revenue-financing arrangement, with a repayment cap of 1.3x. This means then, you’ll end up paying a total of 130,000 for this capital.
\nThe monthly revenue percentage in your arrangement is set at 5%, meaning your average repayment will be 5% x $25,000—or $1,250 per month. In this case, we’ll assume that your sales, do, in fact, remain at $25,000 every month—and therefore, it would take you almost nine years to repay the money you borrowed.
\nNow, although this example gives you an idea of how revenue-based financing works, it’s important to note that this type of business funding often involves amounts of capital and monthly revenues much greater than the numbers we’ve used here.
\n","header":"Revenue-Based Financing Example","button":{"link":null,"text":null}},{"fieldGroupName":"CustomLoanPost_Acfcustomloanpage_pageSection_PageSection_Components_Paragraph","content":"So, continuing off the last point with our revenue-based financing example, the loan amounts, rates, and terms will be very different than what you see with traditional business loans.
\nFirst and foremost, this type of financing usually is available in larger amounts—you can expect a minimum of $100,000 to $2 million or more.
\nIn terms of interest rates, as we discussed above, you’ll typically see these expressed as repayment caps, ranging from 1.35x to 3x. When it comes down to it, repayment caps are very similar to factor rates that you’ll find with a merchant cash advance or short-term loan.
\nTherefore, like any factor rate, you can multiply your principal debt (your financing amount) by the repayment cap to find your total debt.
\nFinally, and again, as we discussed above, because of the way revenue-based financing payments work, you won’t usually see set repayment terms of one, two, or five years. Instead, the term associated with your revenue-based financing will depend on your revenue and the percentage of that revenue (1% to 8%) that you’re paying each month.
\nOnce again, in most cases, you’ll continue to pay your investor or VC firm until you’ve reached the predetermined amount—the repayment cap multiplied by the amount you borrowed.
\nIn this way, the more revenue you make on a monthly basis, and the higher your percentage, the faster you’ll repay your debt.
\n","header":"Revenue-Based Financing Rates and Terms","button":{"link":null,"text":null}},{"fieldGroupName":"CustomLoanPost_Acfcustomloanpage_pageSection_PageSection_Components_Paragraph","content":"Finally, the last component of understanding revenue-based financing is requirements—in other words, what businesses are eligible for this type of funding.
\nAs we’ve mentioned, you’ll find that traditional business loan requirements are not necessarily applicable to revenue-based financing.
\nThis being said, to be eligible for this financing, you’ll typically need:
\nGenerally, you’ll see that SaaS and technology companies, as well as subscription-based businesses, are top candidates for revenue-based financing.
\nAdditionally, because eligibility for this financing is based largely on sales and revenue—instead of credit score and time in business—you’ll find it’s a popular option amongst startups and other new businesses.
\n","header":"Revenue-Based Financing Requirements","button":{"link":"https://www.fundera.com/apply-for-a-loan","text":"See Your Loan Options"},"rank":1}]}},{"pageSection":{"header":"Revenue-Based Financing: Pros and Cons","components":[{"fieldGroupName":"CustomLoanPost_Acfcustomloanpage_pageSection_PageSection_Components_Paragraph","content":"At this point, we’ve explored the key aspects of revenue-based financing—structure, rates and terms, requirements—as well as reviewed an example. So, you might be wondering, why would a business choose to utilize this type of financing?
\nWhen it comes down to it, like other types of business loans, there are both pros and cons to revenue-based financing.
\n","header":null,"button":{"link":null,"text":null}},{"fieldGroupName":"CustomLoanPost_Acfcustomloanpage_pageSection_PageSection_Components_Paragraph","content":"Here are four revenue-based financing benefits that are worth considering:
\n","header":"Benefits of Revenue-Based Financing","button":{"link":null,"text":null}},{"fieldGroupName":"CustomLoanPost_Acfcustomloanpage_pageSection_PageSection_Components_CollapsibleParagraph","collapsibleParagraphs":[{"header":"Longer Repayment Terms","content":"In contrast to many similar forms of financing, revenue-based financing allows you to take more time to repay your debt. Thanks to the monthly payments that revenue-based financing comes with, repaying your debt could be much more manageable than with other funding options.
\nFor context, similar forms of debt financing—like merchant cash advances—follow the same percentage-based repayment structure, but come with daily repayments instead of monthly repayments.
\nAs a result, revenue-based financing is a much more manageable product to repay.
\n"},{"header":"Larger Financing Amounts","content":"Additionally, when compared to similar forms of funding, revenue-based financing offers up much larger sums of capital.
\nAgain, using the example of merchant cash advances, borrowers can really only expect to secure up to $250,000.
\nMeanwhile, because revenue-based financing bases itself on a longer-term repayment schedule, you’ll be able to access more capital. As we mentioned above, this type of financing is often available in minimum amounts of $100,000 to $2 million—with some firms offering even more.
\n"},{"header":"No Equity Dilution","content":"Moreover, if you choose to go with revenue-based financing over traditional VC or equity financing, then you’ll be able to preserve your equity in your company.
\nTaking on VC funding will mean handing over at least some control of your company. Revenue-based financing firms, provide capital and only ask for their money back—plus interest, of course—over time as your business grows.
\nOn the other hand, VC firms provide capital in exchange for a stake in your company.
\n"},{"header":"Unique Eligibility Requirements","content":"Finally, in comparison to traditional forms of financing, you won’t necessarily need excellent personal credit or multiple years in business to qualify for RBF.
\nIn fact, revenue-based financing for startups is very popular because those businesses often can’t qualify for typical business loans.
\nTherefore, if you can’t qualify for traditional financing due to your credit or time in business, but you have substantial revenue and growth potential, revenue-based financing might be a great option.
\n"}]},{"fieldGroupName":"CustomLoanPost_Acfcustomloanpage_pageSection_PageSection_Components_Paragraph","content":"For all of its merits, revenue-based financing comes with its fair share of downsides, just like any other form of financing.
\nHere are the most notable drawbacks to working with a revenue-based financing firm to fund your business’s growth.
\n","header":"Drawbacks of Revenue-Based Financing","button":{"link":null,"text":null}},{"fieldGroupName":"CustomLoanPost_Acfcustomloanpage_pageSection_PageSection_Components_CollapsibleParagraph","collapsibleParagraphs":[{"header":"High Cost of Capital","content":"One major downside to taking on revenue-based financing?
\nThe cost of capital is extremely high. In fact, it’s one of the highest in the industry. Because revenue-based financing is like a long-term version of merchant financing, it involves taking on massive factor rates.
\nThis being said, because you’ll have longer terms and monthly payments, you’ll accumulate more interest on that debt. As a result, this debt will be very expensive.
\nAlthough the monthly payments will make the process of paying down your debt more manageable, they will also make it so that the process itself takes longer. In turn, the amount of interest you accumulate will be significant—sometimes twice as much as the amount you borrowed.
\n"},{"header":"No Prepayment Incentives","content":"Generally speaking, when you take on larger amounts of debt, your lender will present you with prepayment incentives. Whether it’s a discount or avoided interest, lenders typically give borrowers prepayment incentives to encourage them to pay down their debt ahead of schedule.
\nHowever, because revenue-based financing works a lot like a long-term merchant cash advance, you typically won’t have any incentive to pay down your debt ahead of schedule—because there isn’t really a schedule.
\n"},{"header":"Slow to Fund","content":"Next, keep in mind that revenue-based financing is actually pretty slow to fund.
\nEven if a revenue-based financing firm offers a 30-day turnaround, know that 30 days is actually not that quick by industry standards.
\nConversely, many alternative lenders can fund applications within a single day if you’re prepared with the necessary documents and information when you apply.
\n"},{"header":"Only Suited for Specific Businesses","content":"Finally, although revenue-based financing is much more accessible for startup and newer businesses in that it doesn’t require traditional loan qualifications, you still have to meet fairly specific requirements in order to be eligible for this type of financing.
\nYou’ll need to have extremely strong revenue and growth projections—which isn’t always possible for small businesses, especially those just starting out.
\nAdditionally, many investors and financing firms are only willing to work with particular types of companies—namely, most of the top firms only work with fast-growing tech companies.
\n"}]}]}},{"pageSection":{"header":"The Top Revenue-Based Financing Firms","components":[{"fieldGroupName":"CustomLoanPost_Acfcustomloanpage_pageSection_PageSection_Components_Paragraph","content":"Using these pros and cons, you should be able to determine whether revenue-based financing is a viable form of startup funding for your business.
\nIf you think revenue-based financing might be right for you, you’ll want to look at some of the top investment companies and see what they can offer:
\n","header":null,"button":{"link":null,"text":null}},{"fieldGroupName":"CustomLoanPost_Acfcustomloanpage_pageSection_PageSection_Components_Paragraph","content":"Lighter Capital is a revenue-based financing firm that offers financing to tech companies across the U.S. As long as you averaged at least $15,000 in monthly revenue over your past three months with gross margins of at least 50%, you’ll be a good fit to work with this revenue-based commercial financing company.
\nHere are the numbers on what you can expect from revenue-based financing from Lighter Capital:
\nAnother top revenue-based financing firm, GSD Capital works with early-stage SaaS companies in the mountain west region of the U.S.
\nGranted, GSD only works with a very niche subsect of borrowers, but they also offer some of the best revenue-based financing terms on the market. Plus, they’re able to fund qualifying customers with revenue-based financing in as little as 30 days—which is a pretty quick turnaround for this type of funding.
\nThe following ranges of terms on revenue-based financing make GSD Capital worth mentioning, despite their limited reach:
\nSaaS Capital is a bit different from Lighter and GSD in that they offer a monthly recurring revenue (MRR) line of credit.
\nThis means the amount a business is eligible to borrow is tied to how much revenue they make each month. Additionally, SaaS Capital only works with a very specific subset of businesses: B2B SaaS companies with at least $250,000 in monthly recurring software revenue based in the U.S., Canada, or the UK.
\nIf you fit these criteria, SaaS Capital can offer you the following:
\nMost often, revenue-based financing works like a combination of debt and equity financing—in which investors provide your business with capital that you pay back over time.
\nUnlike a typical business loan, however, your repayments are based on your incoming sales revenue, similar to a merchant cash advance.
\n","header":null}]},{"question":"What is a revenue loan?","answer":[{"content":"A revenue loan is a type of financing that investors or venture capital firms offer to small businesses or startups in exchange for a certain percentage of the business’s future monthly revenues.
\nTypically, the investor or VC firm receives repayment based on the business’s sales until a predetermined amount has been reached.
\n","header":null}]},{"question":"Where can I acquire revenue-based financing?","answer":[{"content":"Revenue-based financing is usually acquired from investors, venture capital firms, or other similar financing firms.
\nSome top revenue-based financing firms include:
\nUltimately, it depends on your specific business situation.
\nIf you want to maintain complete control of your business, revenue-based financing is probably the way to go.
\nThat being said, funding acquired through equity financing comes with no repayment obligation—so there is no financial burden on the company. In this case, if you’re comfortable with diluting some of your equity, equity financing may be the way to go.
\n","header":null}]},{"question":"What happens with my revenue-based financing payments if my revenue decreases? ","answer":[{"content":"One of the benefits of revenue-based financing is that the amount due each month depends on your revenue.
\nSo, if you have a slow month, your payment will be smaller. On the other hand, if you have a great month, you will pay more toward your debt.
\nThe more lean months you have, the longer it’ll take for you to pay back your loan—but at least you won’t be hit with huge late fees.
\n","header":null}]}]}]}},{"pageSection":{"header":"The Bottom Line","components":[{"fieldGroupName":"CustomLoanPost_Acfcustomloanpage_pageSection_PageSection_Components_Paragraph","content":"At the end of the day, only you can decide if revenue-based financing is right for your business.
\nThis being said, although revenue-based financing is an appealing solution for startups, you’ll generally need to meet a very specific mold for this type of financing to work well for your business. Therefore, if you’re a technology, SaaS, or other subscription-based business, you’ll certainly want to consider revenue-based financing.
\nOn the other hand, this type of financing will likely not be a viable solution for many small businesses. In this case, you’ll want to continue to explore your funding options. To this point, if you’re a startup or newer business, you might start your search with online business loans or other flexible forms of financing from alternative lenders.
\n","header":null,"button":{"link":"https://www.fundera.com/apply-for-a-loan","text":"See Your Loan Options"},"rank":2}]}}]},"acfAuthorByline":{"authorName":null},"fdsRelatedPosts":{"fieldGroupName":"fdsRelatedPosts","header":"Related Posts","postCount":5,"automatic":true,"posts":null}},"id":40682,"template":"CustomLoan","categorySlug":"","date":"2020-06-14T14:51:40"}},"staticQueryHashes":[],"slicesMap":{}}