Revenue-based financing, or RBF for short, is a type of loan in which your monthly payments are calculated based on a percentage of your company’s sales. Since this can fluctuate each month, you’ll be required to make payments until the balance of the loan is satisfied.
Compared to traditional loans, RBF is less common, so it can be difficult to find providers with this type of program. Fora Financial is a provider we recommend working with, as it can provide up to $1.5 million in funding, prepayment discounts, the flexibility to use funds for nearly any business expense, and the opportunity to request additional funding even before the current loan has been fully repaid.
Example of How Revenue-based Financing Works
A revenue-based loan is much simpler than many other forms of financing, as payments are based on a percentage of your revenue. Below is an example of how your monthly payments would be determined if you took out a $100,000 loan with a revenue share of 5%.
Month | Revenue Earned | Monthly RBF Loan Payment |
|---|---|---|
January | $30,000 | $30,000 × 5% = $1,500 |
February | $10,000 | $10,000 × 5% = $500 |
March | $15,000 | $15,000 × 5% = $750 |
As you can see from the example, months with higher sales correspond to higher monthly payments, which can help you pay off the loan more quickly. Since shorter-term loans generally represent a lower risk to lenders, having a history of high sales can help you qualify for more favorable rates.
Revenue-based Loans: Rates, Terms & Qualification Requirements
Rates, terms, and qualification requirements for a revenue-based loan can vary depending on your chosen provider. Lenders generally want to see that the loan can contribute to the ability to increase your sales.
To give you an idea of what you might expect, here are some typical figures you might see:
Typical Rates & Terms | |
|---|---|
Loan Amount | $25,000-$10 million |
Interest Rate | 20%-40% |
Payment Terms & Fees | 2%-10% of monthly revenue |
Total Cost of Capital | 1.3x-1.8x the borrowed amount |
Application to Funding Speed | Around 2-4 weeks |
Typical Qualification Requirements | |
Monthly Revenue | $30,000-$50,000 |
Gross Margin | 50% or greater |
Time in Business | 6 months or more |
Pros & Cons of Revenue-based Financing
| PROS | CONS |
|---|---|
| Business owners do not need to give up equity in exchange for funding. | Low-revenue-earnings businesses may have difficulty qualifying. |
| It can help with cash flow issues since monthly payments are based on revenue earned. | It can be difficult to find this type of financing. |
| Funding can be easier to get for startups and businesses with bad credit. | It is more expensive than more traditional types of loans. |
Who Should Consider Revenue-based Financing
Since payments are based on a percentage of your sales, a big advantage of RBF is that it shouldn’t strain your company’s cash flow. Because of this, it can be a good option if your business has fluctuating revenue. Common scenarios include the following:
Seasonal Businesses
Companies operating seasonally may have a difficult time making payments on a traditional loan during the inactive months when income is low or nonexistent. A revenue-based loan, on the other hand, won’t hamper business operations as it can allow for lower payment amounts during the off-season, with larger repayment amounts being made during the more active months of the year.
Businesses With a Subscription-based Revenue Model
Businesses generating a large amount of revenue through a subscription-based model could see fluctuations in sales if customers decide to discontinue their use of the product. This is especially true if subscriptions are on a short-term basis with no minimum time commitment.
In this scenario, RBF can ensure that your company’s cash flow is not disproportionately impacted, should a large portion of customers decide they no longer want or need your company’s products or services.
Companies With an Uncertain Income Forecast
Revenue forecasts and sales projections always come with a degree of uncertainty, which can be due to many internal or external factors. Revenue-based loans can significantly reduce the potential negative impacts if a company has an unexpected decline in sales, tying payments to a percentage of actual sales made.
Differences Between Revenue-based Loans, SBA Loans & Venture Capital
Small Business Administration (SBA) loans and venture capital are two popular financing alternatives. Here is how RBF stacks up against them, followed by a deeper dive into these options.
Revenue-based Financing | SBA Loans | Venture Capital | |
|---|---|---|---|
Typical Loan Rates & Terms | |||
Funding Amount | $25,000-$10 million | Up to $5.5 million | $100,000-$25 million |
Interest Rate | 20%-40% | 5%-15% | N/A |
Repayment Term & Schedule | 2%-10% of monthly revenue | Monthly, up to 25 years | No monthly payments required |
Application to Funding Speed | 2-4 weeks | 30-90 days | 3-6 months |
Collateral | Not required | May be required | Not typically required |
Documentation Requirements | Low | High | High |
Prepayment Penalty | None | Yes | N/A |
Business Control | No loss of business control | No loss of business control | Must give up some equity |
Typical Qualification Requirements | |||
Monthly Revenue | $30,000-$50,000 | $0-$15,000 | None, but must have high growth potential |
Time in Business | 6+ months | 6+ months | None |
Credit Score | None | 680 | None |
These are government loans issued by private lenders and guaranteed by the SBA. They generally require good credit and strong business finances to qualify—but they can offer some of the most competitive rates available.
You can choose from different types of SBA loans depending on what you plan to use the funds for. For example, SBA 7(a) loans can be used for a wide variety of business expenses, such as equipment, inventory, and operational expenses. Funds from an SBA 504 loan, on the other hand, can be used for major assets designed to promote job growth, such as the acquisition of real estate or the improvement of land.
SBG Funding is a provider we recommend if you’re looking for an SBA loan. It offers competitive rates and terms, earning it a place on our list of the leading working capital loans.
Getting funds from a venture capital firm comes at the cost of giving up ownership interest in your company. However, a major benefit is that venture capital is not considered a form of debt; therefore, it requires no monthly payments. Working with a firm also means you’ll work with a team of investors who can provide additional resources and guidance to help your business succeed.
One downside is that since firms often invest in companies they believe to have high growth potential, there can be a lengthy due diligence process before funding is issued. It is not unusual to have to wait six months or more before funds are disbursed.
Frequently Asked Questions (FAQs)
From application to funding, it can take two to four weeks. Once you’re approved, however, it’s possible to get revenue-based financing within 24 to 72 hours. This depends on the lender you choose and the complexity of your company’s credit and finances.
Revenue-based loans can be easier to get compared to most traditional loans. Lenders offering this type of program often have flexible requirements for things like credit score, time in business, and revenue. Check out our guide on how to get a small business loan for insights on how you can improve your odds of getting the best rates and terms.
Online lenders and business loan brokers are two types of companies you can use to shop for this type of loan. Some banks and credit unions may also offer this as a loan option, but it can be more difficult to find as revenue-based financing is a niche product, far less common than traditional business loans.
Bottom Line
RBF can be a good option for business owners concerned about how taking on additional debt could impact their company’s cash flow. While traditional loans may require fixed payments regardless of your company’s financial performance, revenue-based loans can allow for smaller payments during periods of reduced revenue earnings.
It can, however, be more expensive than some alternatives. So, we also recommend considering our recommendations for the best cash flow loans to ensure you’re getting the best rate.
