As a business owner, you are likely familiar with traditional financing options like loans or venture capital, but have you considered revenue-based financing (RBF)? This alternative funding model offers a unique way to raise capital for your business by tying repayment to your company’s revenue, rather than fixed interest rates or equity stakes.
In this guide, we’ll explain how revenue-based financing works, the pros and cons, and how it compares to other financing options. By the end, you’ll have a clear understanding of whether RBF is the right choice for your company.
Revenue-based financing (RBF) is a form of funding where a business receives capital in exchange for a percentage of its future monthly revenue. The repayment is typically structured as a percentage of monthly sales until the agreed-upon amount is repaid, which includes the original investment plus a predetermined multiple of that amount.
Unlike equity financing, which involves giving up ownership of your business, or traditional loans, which require fixed payments regardless of performance, RBF is more flexible, as payments fluctuate based on your company’s revenue.
Repayment tied to revenue: The repayment amount is based on a percentage of your monthly revenue, so it increases when sales are strong and decreases when sales dip.
Non-dilutive capital: You don’t give up equity in your business, and you retain full ownership and control.
Fixed repayment cap: The repayment amount is typically capped, meaning you’ll know the total amount to be repaid before entering the agreement.
The Business Secures Funding: The business enters an agreement with a lender or investor to receive a lump sum of capital. This capital is typically used for growth purposes such as marketing, hiring, or product development.
The Repayment Model: The lender receives a percentage (usually between 2-10%) of the business’s monthly revenue. This continues until the agreed-upon repayment cap is reached, which typically includes the loan principal plus a multiple (e.g., 1.5x to 3x) of that amount.
Flexible Payments: Since the repayment is tied to your monthly revenue, if your revenue is low in any given month, your payment will be lower as well. Conversely, during high-revenue months, the payments increase accordingly.
No Equity Dilution: Unlike venture capital, revenue-based financing does not involve giving up ownership of your business. You retain full control.
Unlike venture capital or angel investing, revenue-based financing allows you to raise capital without giving up equity in your business. This means you retain full ownership and control over your company’s decisions.
For business owners who want to maintain control and ownership, RBF is an attractive option since it allows you to keep the profits and decision-making to yourself.
The repayment structure is tied to your company’s revenue, which means it’s flexible. During months when your business experiences high sales, you’ll pay more, but during slower months, the payments decrease accordingly.
This flexibility makes RBF an appealing option for businesses with fluctuating revenue streams, such as seasonal businesses, startups, or businesses in growth phases. You don’t have to worry about fixed payments that can put strain on your cash flow during slower periods.
Revenue-based financing is generally faster to secure than traditional loans. The application process is often streamlined, with fewer requirements than banks or venture capitalists. The lenders focus more on your monthly revenue than on credit scores or collateral, which can make it easier to qualify.
If you need capital quickly to seize an opportunity or address a short-term financial need, RBF provides a faster, more accessible solution than other financing methods.
RBF is unique because it is a hybrid form of financing. It does not involve the giving up of equity (like venture capital), nor does it require fixed repayments (like traditional debt financing). This allows for more creative and flexible financial solutions.
This can be especially valuable for growing businesses that don’t want to dilute ownership or take on large amounts of debt with fixed monthly payments.
While RBF doesn’t require equity dilution, the total cost of capital can be higher than traditional loans, especially if the business experiences rapid growth. The repayment terms are often based on a multiple of the loan amount (such as 1.5x to 3x), which can lead to paying back significantly more than the original loan.
Though RBF can be a flexible option, the higher cost of capital means it might not be the best option for businesses with lower revenue or those that expect slower growth. If your business is growing quickly, the repayments can become steep.
Since the payments are tied to your revenue, they can fluctuate. During periods of slow sales or market downturns, your business could find it harder to make payments. Although the flexibility in payments can be beneficial, it also means that there is no certainty in your payment schedule.
If your revenue decreases for an extended period, it may become difficult to meet the repayment terms. RBF might not be the best choice for businesses with unpredictable or volatile revenue.
To qualify for revenue-based financing, lenders typically require your business to have a steady track record of revenue. This makes RBF less accessible to startups that have not yet proven their revenue potential or businesses in industries with highly seasonal sales.
If your business is in an early growth stage and has irregular revenue, you may have difficulty qualifying for RBF or may not be offered favorable terms.
While RBF is a great option for smaller to mid-sized funding needs, it may not be the best choice for businesses that need significant capital for large-scale expansion or equipment purchases. The amounts available through RBF are generally smaller compared to what banks or venture capitalists can provide.
If your business needs substantial capital for large-scale investments, RBF may not provide enough funding. In such cases, you may need to consider business loans or equity funding.
Revenue-based financing is ideal for businesses that:
Have steady, predictable revenue.
Want to avoid equity dilution.
Need flexible repayment terms that scale with their revenue.
Need quick access to capital without the lengthy process of traditional loans or venture capital.
Are in growth phases but don’t want the burden of fixed loan payments.
If you decide that revenue-based financing is the right option for your business, here are the basic steps to get started:
Evaluate your eligibility: Make sure your business has consistent monthly revenue and a strong track record of performance.
Choose a platform: Research different RBF platforms or lenders to find one that aligns with your business’s needs and goals. Popular platforms include Lighter Capital and Capify.
Prepare your documents: You’ll need to provide proof of revenue, business financials, and a plan for how you intend to use the capital.
Review terms: Understand the repayment structure, interest rate, and total cost of the capital before committing.
Accept the funding: Once you’re approved, you can accept the capital and start using it to grow your business.
Revenue-based financing can be a flexible and accessible alternative to traditional loans or equity funding, especially for businesses with steady revenue looking for quick access to capital. It offers flexibility in repayment, non-dilutive funding, and the potential for faster growth, but it also comes with higher costs and fluctuating payments.
If you’re looking for a non-dilutive way to fund growth, have predictable revenue, and can handle fluctuating payments, RBF could be a great fit for your business. However, if you’re looking for a large sum of capital or prefer fixed repayment schedules, you may want to explore other options.