Revenue based financing is a loan where repayments are based on a percentage of your business’s revenue rather than a fixed amount. For high margin, high growth businesses like SaaS companies, this can be a great alternative to equity financing. For brick and mortar small businesses, this works more like a merchant cash advance. This article will focus on how revenue based financing works for high-growth businesses.
In this article we will cover:
- What Revenue Based Financing Is and How it Works
- Who is Revenue Based Financing Right For?
- Where to Get Revenue Based Financing
- Revenue Financing vs. Traditional Loan
- Revenue Financing vs. Venture Capital
Revenue based financing, also known as royalty based financing or RBF, is a highly customized loan. We will discuss general terms and qualifications in this article, but each loan is going to depend greatly on your business revenues, the structure of your business, and your business’s potential for growth.
What Revenue Based Financing Is and How it Works
Revenue based financing is a type of small business loan where your monthly payment increases and decreases based on your revenues. Lenders charge a fixed amount for this growth capital, which generally ranges between 1x – 3x the amount borrowed. Because repayment of the loan is based on your revenues, the time it takes to repay the loan will fluctuate. The faster your revenue grows, the quicker you’ll repay the loan and vice-versa.
Loan sizes typically range from $50,000 to $1,000,000. The percentage of monthly revenues committed to repayment can be as high as 8%. That means on good months you pay back more and on bad months you pay back less. Payments are made until you’ve paid back the loan in full.
The duration of the loan ultimately depends on the success of the business. The quicker the business grows, the quicker the loan is paid in full. The RBF provider sees better returns the faster you pay the loan in full. This is one reason the underwriting process is focused on not only your current revenues but on your business’s potential to quickly grow revenues.
The table below displays the general terms and requirements to get funded for revenue based financing.
Revenue Based Financing Overview
| Minimum Monthly Revenue Requirements | $15,000 - $100,000 |
| Loan Amounts | $50,000 - $1,000,000 |
| Gross Margin Required | 50%+ |
| Payment Terms | A percentage of gross monthly revenue (usually 3-8%) paid monthly |
| Total Cost of Capital | 1x - 3x borrowed amount |
| Interest Rate | 18% - 30% |
| Funding Speed | 3 - 4 Weeks |
While many traditional business loans will have minimum revenue requirements, they are not RBFs. If you need a non-traditional loan option, but revenue based financing is not right for you, check out our article on alternative small business loans.
Who Revenue Based Financing is Right For
Revenue based financing is typically used by businesses with high gross margins and subscription based revenue models as growth capital to scale operations. This generally means software as a service (SaaS) businesses, but businesses with a steady stream of monthly recurring revenue (MRR) can find revenue based loans to be a good fit as well.
Revenue based funds are generally expected to be used as growth capital to scale your business by expanding efforts like product development, sales and marketing initiatives, new hiring, or other growth opportunities with the goal of 10x your existing business revenue. Providers will expect you to have a plan to do this during the application process. This is similar to what venture capitalists would ask for through a fundraising process.
Many businesses are too small for venture capitalists, but still have solid revenue streams that can grow and be sustainable for a long time. While these businesses may not be the next Facebook, which is what venture capitalists are looking for, they still have a sustainable revenue model, and they need growth funding to reach their full potential. Revenue based financing can be a good fit for software companies that fit this mold.
Some businesses will be growing quickly enough to be courted by venture capitalists but might not like the idea of diluting their equity or giving some degree of control to the VC. If your business is ready to scale quickly and needs capital to do that but you don’t want VCs interfering with your company, then a revenue based loan might be a great solution.
A revenue based loan can also be a good option if you do not qualify for more traditional business loans. Some businesses may find that while they have strong recurring revenues, their business is too new or they lack the personal credit profile or assets to qualify for traditional financing. Royalty based financing can help these startups with the growth capital they need to build their business faster than they would otherwise be able to.
Where to Get a Revenue Based Loan
Revenue based financing is not a product that is offered through traditional banking sources. Revenue based loans are found through niche lenders that offer this product, and often only this product.
Two sources for revenue based financing are Lighter Capital and Rock and Hammer Ventures. The table below displays an overview comparison of these two revenue based financing providers.
Revenue Based Financing Lender Comparison
| Lighter Capital | Rock and Hammer Ventures | |
|---|---|---|
| Revenue Requirements | $15,000+ per month | $30,000+ per month |
| Loan Amounts Per Funding Event | $50,000 - $500,000 or 1/3rd of annual business revenue | $100,000 - $1,000,000, up to 3x - 5x MRR (Monthly Recurring Revenue) |
| Lifetime Maximum Loan Amount | $2,000,000 | Depends on business and repayment performance |
| Minimum Gross Margin | 50%+ | 50%+ |
| Total Cost of Capital | 1x - 3x Loan amount | 1x - 1.5x Loan amount |
| Funding Speed | 3 Weeks | 30 Days |
| Lender Examples | Visit Lighter Capital | Rock and Hammer Ventures |
Revenue Based Funding Qualifications & Application Process
The qualification process is built around what your business revenues currently are, and how quickly they are likely to grow. The entire process is quick and easy, and you can be funded within 30 days.
Revenue Requirements
You need to be generating at least $15,000 – $30,000 of revenue per month. Your revenues need to be either subscription based or predictable monthly recurring revenues.
Total Funding Amounts
You can fund $50,000 – $1,000,000 through a revenue based loan. The total funding amount will generally be a multiple (3x – 5x) of your monthly revenue. If you need more than that, you can usually go back to the RBF provider for additional funding after making timely payments for 6+ months.
Lifetime Maximum Loan Amount
Revenue based loan providers can lend more than the original loan amount at a later time if your business grows successfully. Some lenders, such as Lighter Capital, will fund up to a certain amount in each approved funding round, but they will never lend more than their lifetime maximum of $2,000,000 per business.
Each loan provider has different rules and maximum lifetime loan amounts, which may change based on your situation, so it is best to ask each provider directly what you may qualify for.
Gross Margin
Your gross margin needs to be 50%+.
Payment Terms
Payments are taken directly from your bank account on a monthly basis, and they are calculated as a percent of current monthly revenue. 3-8% monthly revenue in general.
Total Cost of Capital
Typically 1x – 3x the original loan amount
Funding Speed
Revenue based financing generally funds in 3 – 4 weeks.
Documentation Needed
Beyond basic personal and business information, you should expect to provide bank statements for 3 – 12 months and be prepared to submit to a personal credit check. A business plan and/or an investor deck will also typically be required.
Application Process
You can submit an application online that includes basic business and personal information. The lender will connect directly to your bank accounts to verify your revenue through your bank statements. Once everything is verified, the loan will go to underwriting to determine the loan amount and payment terms. These specifics will often be determined by the information provided in your business plan / investor deck with special attention paid to growth potential.
Revenue Based Financing vs Traditional Debt Financing
Traditional debt financing can refer to many different loan types, but it generally refers to a term loan. While traditional lenders take revenue into consideration during the application process, revenue based loans are the only financing option where your monthly payment changes month-to-month in line with that month’s revenue. This is in stark contrast to a term loan, which has a fixed payment every month regardless of your revenue.
The table below compares the differences between a revenue based loan and a general term loan.
Revenue Based Loans and General Term Loans Comparison
| RBF | Term Loan | |
|---|---|---|
| Debt Payments | Flexible, a fixed % of monthly revenue | Fixed, a set amount of principal & interest |
| Primary Underwriting Concerns | Subscription model or stable MRR High growth potential High margins | Credit profile Collateral Time in business |
| Collateral | Not generally required | Can be a condition of the loan |
| Cost of Capital | 1x - 3x original loan balance | Is generally cheaper over the life of the loan |
| Time to Funding | 3 - 4 Weeks | A few weeks to a few months |
| Application Process | Less documentation, easier process | More documentation, longer and more complicated process |
| Repayment Time Period | Repayment speed depends on your speed of revenue growth, but generally not more than 4 years. | Term loans can be repaid between 5 and 25 years depending on the type of loan and what the funds are used for |
| Prepayment Penalty | Typically has no prepayment penalty | Can have prepayment penalties that decrease in cost each year |
Revenue Based Financing vs Venture Capital
Venture capital firms invest in growth businesses that can scale, and they often want a 100x return on their investment. If you have a fast growing business but think growth will be more like 10x instead of 100x, then revenue based financing might be a better growth capital option.
Revenue based financing is also a good option for those businesses that are looking to preserve their equity. Venture capitalists will be providing you with growth capital in exchange for an equity stake in your business. In most cases, the venture capital firm will also insist on asserting some level of control over your business as well. Revenue based financing does not result in a dilution of your equity and does not cede any control of your business to the RBF provider.
The table below compares differences between venture capital and revenue based financing.
Revenue Based Financing and Venture Capital Comparison
| RBF | Venture Capital | |
|---|---|---|
| Debt Payments | Must be made monthly | No Payments |
| Primary Approval Concerns | Subscription model or stable MRR High growth potential High margins | Business plan Management team IRR Growth opportunities Speed and ability to scale |
| Equity | No equity is given up | A portion of the business’s equity is given in exchange for funds |
| Business Control | Providers never take control during repayment | May take a portion of control and decision making away from the business owners |
| Returns | Providers have no set return requirements | VC’s need to have high returns (as high as 100x) |
| Time to Fund | 3 - 4 Weeks | Can take 3 - 6+ months |
Bottom Line
Revenue based financing is a very niche loan that can be an excellent fit if your business is a high margin, high growth tech company with a subscription based revenue model or stable monthly recurring revenue. Generally, businesses with at least $15,000 in monthly revenue looking for financing to scale their business without diluting their equity should consider a revenue based loan. Businesses that would not qualify for royalty based financing, but are looking for less traditional forms of financing (like term loans) should read our indepth guide to alternative business loans.
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