Revenue-based financing (RBF) is funding offered by niche lenders in which payment amounts are based on a percentage of monthly business revenue. RBF works well for businesses with stable revenue streams but without the collateral needed for a traditional loan. The total cost for RBF can range from 1.35x – 3x the amount borrowed.
With Lighter Capital, you can receive up to one-third of your annualized revenue run rate, providing up to $3 million in growth capital for your technology startup! Payments are based on a fixed percentage of your income ranging from 2% to 8%, with repayment caps of 1.35x to 2.0x. Apply online and receive funding within as little as four weeks.
Can you qualify for Payroll Protection Program Loans?
What Revenue-Based Financing Is & How It Works
Revenue-based financing (RBF) is a type of small business loan in which your monthly payment increases and decreases based on your revenues. Lenders charge a fixed amount for this growth capital, which generally ranges between 1.35x and 3x the amount borrowed. Loan sizes typically range from $50,000 to $3,000,000.
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. The percentage of monthly revenues committed to repayment can be as high as 10%. Your monthly payments will fluctuate with your revenue highs and lows, and will continue until you’ve paid back the loan in full.
The duration of the loan ultimately depends on the success of the business. The faster the business grows, the faster the loan is repaid. The RBF provider sees better returns the faster you pay the loan in full. This is one reason the underwriting process is focused not only on your current revenues, but also on your business’ potential to quickly increase revenues.
The general terms and requirements for revenue-based financing are:
Revenue-Based Financing Overview
|Minimum Monthly Revenue Requirements||$15,000 - $100,000|
|Loan Amounts||$50,000 - $3,000,000|
|Gross Margin Required||At least 50%|
|Payment Terms||A fixed monthly percentage of gross (usually 3% - 10%)|
|Total Cost of Capital (Repayment Cap)||1.35x - 3x borrowed amount|
|Interest Rate||18% - 30%|
|Funding Speed||3 - 4 weeks|
Revenue-based funds are generally expected to be used for growth capital to scale your business by expanding efforts, such as:
- Product development
- Sales and marketing initiatives
- Hiring additional employees
Providers will expect you to have a plan to increase your existing business revenue tenfold as part of the application process. Because your loan is based on your current revenue stream, lenders will want to see potential growth opportunity for your business. Their expectation is that the funds that they are lending you will be used to initiate and support that growth. This is similar to what venture capitalists would ask for through a fundraising process.
Who Revenue-Based Financing Is Right For
Revenue-based financing (RBF) 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 steady monthly recurring revenue (MRR) can find revenue-based loans to be a good fit as well.
Businesses that are most likely to find RBF appealing are those that are too small to attract venture capitalists, as well as businesses that want to retain control of their company or are unable to acquire other financing.
Small businesses that might be interested in revenue based financing include:
1. Businesses Too Small for Venture Capitalists
Many businesses are too small to attract venture capital investments, but still have solid revenue streams that can grow and be sustainable for a long time. RBF can be a good fit for companies that fit this mold because revenue-based lenders make loans based on growth potential, and are not looking for the huge returns that venture capitalists demand.
2. Business Owners Wanting to Retain Control
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 venture capitalist. With RBF, you are receiving a loan to be repaid to the lender, which does not require release of an equity stake in your business, as you would have with funding from a venture capitalist.
3. Businesses Unable to Obtain Other Financing
A revenue-based loan can also be a good option if you do not qualify for more traditional working capital 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 other small business startup loans. RBF 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
Finding a lender that offers revenue-based financing (RBF) can be more difficult than finding a lender for other more common financing options. Revenue-based business loans are only offered by niche lenders who often only offer this form of financing. Two companies that offer RBF are Lighter Capital and GSD Capital.
Some of the details and requirements for RBF with Lighter Capital and GSD Capital are:
Revenue-Based Financing Lender Comparison
|Revenue Requirements||$15,000+ per month||$30,000+ per month|
|Loan Amounts Per Funding Event||$50,000 - $3,000,000 or one-third of annual business revenue||$200,000 - $1,000,000, up to 6x MRR (Monthly Recurring Revenue)|
|Lifetime Maximum Loan Amount||$3,000,000||Depends on business and repayment performance|
|Minimum Gross Margin||0.5||0.5|
|Total Cost of Capital||1.35x - 2.0x loan amount||1.4x - 1.7x loan amount|
|Funding Speed||3 weeks||30 days|
|How to Apply|
The qualifications, terms, and application process for RBF are:
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. If you need funding sooner, there are other fast business loans available.
You need to be generating at least $15,000 to $30,000 of revenue per month. Your revenues need to be either subscription-based or predictable monthly recurring revenues. Additionally, your gross profit margin needs to be at least 50%.
Total Funding Amounts
You can fund $50,000 to $3,000,000 through a revenue-based loan. The total funding amount will generally be a multiple (3x to 6x) 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 at least six 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 $3,000,000 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.
Revenue-Based Financing Rates & Terms
The total cost of capital for a revenue-based loan (referred to as the repayment cap) typically ranges from 1.35x to 3x the amount borrowed. Payments are calculated as a percentage of current monthly revenue (typically ranging from 3% to 8%), and are debited directly from your bank account on a monthly basis.
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 be based on the information provided in your business plan, or investor deck, with special attention paid to growth potential.
The typical additional documentation that you will need to include with your application is:
- Bank Statements: Three to 12 months of business bank statements
- Business Documents: Business plan or an investor deck
Revenue-Based Financing vs Conventional SBA Loans
An SBA loan is a common financing solution for small businesses. Traditional banks and SBA lenders consider your revenue during the application process to determine the loan amount that you can borrow (SBA loans are also available to startups).
Your SBA loan is set up to repay the loan amount with fixed monthly payments amortized over the term of the loan. With revenue-based loans, your revenue is re-evaluated on a monthly basis to determine your payment for that month, meaning that your payment amount will vary from month-to-month based on your revenue.
Some of the differences between a revenue-based loan and an SBA loan are:
Revenue-Based Loans vs SBA Loans
|Revenue-Based Financing||SBA Loan|
|Debt Payments||Variable, a fixed % of monthly revenue||Fixed, a set amount of principal & interest|
|Primary Underwriting Concerns||Stable monthly revenues|
High growth potential
Time in business
|Collateral||Not generally required||Can be a condition of the loan|
|Cost of Capital||8% - 75% estimated APR||7.5% - 10% APR|
|Time to Funding||3 to 4 weeks||30 to 90 days|
|Application Process||Less documentation, easier process||More documentation, longer and more complicated process|
|Repayment Time Period||3 - 5 years||5 - 25 years, depending on loan use|
|Prepayment Penalty||Typically no prepayment penalty||May have prepayment penalties that decline over time|
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 initial investment. If you have a rapidly growing small business, but think that 10x growth is more likely than 100x growth, then revenue-based financing (RBF) might be a better growth capital option.
RBF is also a good option for those businesses that are looking to preserve their equity. Venture capitalists provide 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. RBF does not result in a dilution of your equity and does not cede any control of your business to the RBF provider.
Derek Erwin, Content Director at Lighter Capital, explains the circumstances as to when RBF may be a better option than venture capital financing, stating that:
“While many startups rely on bootstrapping or funding from friends and family to get their ideas up and running pre-revenue, as you start to grow your concept, angel investors can provide small, early sums of funding along with operating expertise and consulting.
But from our experience at Lighter Capital, it’s the next stage of a business’ growth trajectory—launch and initial traction—that is the most exciting but also challenging. It’s also at this stage that venture capital becomes an option.
Venture capitalists usually provide a large capital investment (relative to the size of the business) in exchange for equity. They can also provide access to human capital, connections, and guidance to help grow the company—if you’re willing to exchange equity and give up a considerable amount of control over your business.
Another alternative at this stage is revenue-based financing. Revenue-based financing is a perfect fit for startups that have strong growth potential and are generating monthly recurring revenue, or for startup founders who want to retain ownership of their business and run it for the long term.
This debt option offers an upfront investment with monthly repayments based on a percentage of the revenue earned by the business in that month. There is no equity dilution and, in the long run, the cost of capital is cheaper than equity. It requires no personal guarantee, board control, or covenants. It’s also usually a fast and easy application and funding process. Revenue-based financing does tend to be a bit more expensive than bank financing, but bank loans are typically not available at this stage and they almost always include a personal guarantee.”
With this is mind, some of the differences between RBF and venture capital are:
Revenue-Based Financing vs Venture Capital
|Revenue-Based Financing||Venture Capital|
|Debt Payments||Must be made monthly||No payments|
|Approval Considerations||Stable MRR|
High growth potential
Speed and ability to scale
|Equity||No equity is given up||Some business equity is given in exchange for funds|
|Business Control||No loss of business control||May take a portion of control/decision-making|
|Returns||Limited to repayment cap||VCs need to have high returns (as high as 100x)|
|Time to Fund||3 - 4 weeks||At least 3 - 6 months|
Pros & Cons of Revenue-Based Funding
Revenue-based funding (RBF) can be easier to qualify for than traditional bank financing, and your payments adjust to your current monthly revenues. Additionally, you can receive funds faster with RBF than you can with a traditional loan or venture capital, and unlike with venture capital funding, you can retain your ownership equity. However, RBF does have a higher overall cost of capital than traditional and venture capital financing, and has shorter repayment terms.
Pros of Revenue-Based Funding
Some of the pros of RBF are:
- Qualifications Are Easier Than Traditional Financing – Traditional banks require high credit scores, significant annual revenues, and often multiple years of business operations to qualify. RBF, however, is based primarily on your current monthly revenues and the forecasted growth of your business.
- Repayment Flexes with Your Revenues – With most financing sources, you are locked into a fixed monthly payment for the entire term of your loan. RBF is based on a fixed percentage of your monthly revenues, so in months where your revenue is down, your payment is less. Conversely, in the months where your revenue increases, your payment increases as well, thereby paying your debt off sooner.
- Funding Is Faster Than Traditional Loans or Venture Capital – With traditional loans and venture capital funding, it can take several months before you receive funds. Revenue-based lenders can provide funding within a few weeks.
- Equity Is Retained – Venture capital investors require an equity stake in your business in exchange for their funds, placing members on your board, and diluting your personal decision-making abilities. With RBF, you retain all of your business equity.
Cons of Revenue-Based Funding
Some of the negative aspects of RBF are:
- Costs Are Higher Than Traditional Financing – Interest rates on traditional business loans offer a lower cost of capital than you can get with RBF.
- Regular Payments Are Required – Venture capital funding is not a loan. There are therefore no monthly payments to worry about. However, the venture capital firm will claim an equity stake in your company. RBF requires monthly payments until the loan is paid in full.
- Repayment Period Is Shorter Than with Traditional Financing – Traditional bank financing can have repayment periods as long as 10 to 25 years, depending on the loan. RBF has shorter loan terms of only three to five years.
Revenue-based financing can be an excellent fit if your business is a high-margin, high-growth tech company with 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.
Lighter Capital offers revenue-based financing of up to $3 million (or one-third of your annualized revenue run rate), with repayment terms ranging from three to five years. Payments are based on a fixed percentage of your monthly income, ranging from 2% to 8%, with repayment caps of 1.35x to 2.0x. Apply online and receive your revenue-based funding within as little as four weeks.