Revenue-based Financing: How a Revenue-based Loan Works
This article is part of a larger series on Business Financing.
With revenue-based financing (RBF), your monthly loan payments vary based on the revenue earned by your business. Payments must then be made until a predetermined amount has been reached. Since payments can go up or down based on the amount of sales you make, this type of financing can be a good option for business owners concerned about having cash flow issues due to seasonality or other factors.
RBF is a niche product, so it can be difficult to find lenders that offer this type of loan. Uncapped is one provider we recommend—it can provide up to $10 million in funding, fees as low as 2%, and offers as fast as 24 hours.
Example of How Revenue-based Financing Works
RBF isn’t as complex as other types of loans can be. Here is an example of how it can work.
If you get a revenue-based loan of $100,000 with a revenue share of 5%, here is what your monthly payments might look like depending on your gross sales:
Month | Revenue Earned | Monthly RBF Loan Payment |
|---|---|---|
January | $30,000 | $30,000 x 5% = $1,500 |
February | $10,000 | $10,000 x 5% = $500 |
March | $15,000 | $15,000 x 5% = $750 |
As you can see, your monthly payments can vary based on your sales, and you’ll need to continue to make payments until the original loan balance (or other predetermined amount per your loan agreement) has been reached.
Monthly payments for RBF are based on your earned revenue, so the more revenue you earn, the quicker the loan can be repaid. Since shorter-term loans can represent a lower risk to lenders, demonstrating a history of high revenue earnings may help you get better loan terms and lower rates.
Revenue-based Loans: Rates, Terms & Qualification Requirements
Rates, terms, and qualification requirements for a revenue-based loan can vary depending on the provider you choose. 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 to $10 million |
Interest Rate | 20% to 40% |
Payment Terms & Fees | 2% to 10% of monthly revenue |
Total Cost of Capital | 1.3x to 1.8x the borrowed amount |
Application to Funding Speed | Around 2 to 4 weeks |
Typical Qualification Requirements | |
Monthly Revenue | $30,000 to $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 |
| Can help with cash flow issues since monthly payments are based on revenue earned | Can be difficult to find this type of financing |
| Funding can be easier to get for startups and businesses with bad credit | More expensive than more traditional types of loans |
Who Should Consider Revenue-based Financing?
Many businesses utilizing RBF have strong, consistent sales. This commonly includes those operating with a subscription-based model, product development, software-as-a-service (SaaS), or other type of business model that has recurring income.
This type of financing can be a good fit for you if you fall into any of the following categories:
You have strong revenue.
It’s not uncommon for RBF providers to require businesses to have high monthly revenue as a qualification requirement. Because the speed of repayment is based on gross sales, a high revenue may limit a lender’s risk exposure.
Eligibility criteria for an RBF loan typically require you to have $30,000 to $50,000 of monthly revenue. However, if you don’t meet this, you might still be able to qualify if you can show an increasing trend in sales.
You have been unable to get other types of financing.
RBF places a strong emphasis on your company’s monthly revenue. As a result, it can be easier to get as compared to other types of loans. Many providers work with businesses that have bad credit. It can also be easy to find lenders willing to issue funding to a startup company.
If you’re looking for a place to start, then refer to our lists of the:
You don’t want to give up ownership interest in exchange for funding.
Unlike some types of financing, RBF does not require you to give up equity in your company in exchange for funding. While giving up equity may be less of an issue for early-stage startups, it can impact your ability to make major business decisions as your company grows. Venture capital is one type of financing that often requires business owners to give up equity to get funding.
If you’ve decided that RBF is the right fit for your business, you can head over to our guide on how to get a small business loan for tips on choosing a lender, preparing for each step of the loan process, and improving your chances of getting approved.
Differences Between Revenue-based Financing, SBA Loans & Venture Capital
Small Business Administration (SBA) loans and venture capital are two other forms of financing commonly considered by startups. 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 to $10 million | Up to $5.5 million | $100,000 to $25 million |
Interest Rate | 20% to 40% | 5% to 15% | N/A |
Repayment Term & Schedule | 2% to 10% of monthly revenue | Monthly, up to 25 years | No monthly payments required |
Application to Funding Speed | 2 to 4 weeks | 30 to 90 days | 3 to 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 | |||
Revenue | $30,000 to $50,000 monthly | $0 to $15,000 monthly | None, but must have high growth potential |
Time in Business | 6-plus months | 6-plus months | None |
Credit Score | None | 680 | None |
It can be a lengthy process to get funds from any of the financing options mentioned above. If you need funding urgently, check our roundup of the best fast business loans.
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 on using 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 that are 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 position 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 it is not considered a form of debt; therefore, it requires no monthly payments. Working with a venture capital 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 venture capital 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.
For more on this, read our article on the advantages and disadvantages of venture capital. Or if you’ve decided that it fits the bill, refer to our guide on how to raise venture capital funding.
Bottom Line
RBF can get you the funding you need without giving up equity in your company. It can also help your business’s cash flow since payments are based on gross sales. However, since revenue-based loans can be more expensive than other types of loans, it’s important to consider alternatives, such as our recommendations for the best cash flow loans, to get the best rates and terms for your business needs.
