Revenue-based Financing: How a Revenue-based Loan Works
Tom has 15 years of experience helping small businesses evaluate financing and banking options. He shares this expertise in Fit Small Business’s financing and banking content.
This article is part of a larger series on Business Financing.
Revenue-based financing (RBF) is a type of small business loan offered by niche lenders in which your monthly payments increase or decrease based on your revenue. RBF works well for businesses that have stable revenue streams but don’t have the collateral needed for a traditional loan.
Lenders charge a fixed amount, typically between 1.35x to 3x the amount borrowed. Typically, loan sizes range from $50,000 to $3 million. Your monthly payment fluctuates based on changes in revenue. The faster your revenue grows, the quicker you’ll repay the loan.
Revenue-based Financing Overview
Minimum Monthly Revenue Requirements | $15,000 to $100,000 |
Loan Amounts | $50,000 to $3 million |
Gross Margin Required | At least 50% |
Payment Terms | A fixed monthly percentage of gross (between 3 to 10%) |
Total Cost of Capital (Repayment Cap) | 1.35x to 3x borrowed amount |
Interest Rate | 18% to 30% |
Funding Speed | 3 to 4 weeks |
Revenue-based financing is usually expected to be used 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 documented plan to increase your existing business revenue. Because your loan is based on your current revenue stream, lenders will want to see the potential for the growth of your business, with the expectation that the loan will support that growth.
Who Revenue-based Financing is Right For
Revenue-based financing is used by businesses with high gross margins or subscription-based revenue models as growth capital to scale operations. One example of this would be 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.
Types of businesses that might be interested in revenue-based financing include businesses too small for venture capitalists (VCs), business owners wanting to retain control, and businesses unable to obtain other financing.
1. Businesses Too Small for VCs
Many businesses are too small to attract VC investments but still have solid revenue streams that can grow and be sustainable for a long time. Revenue-based financing can be a good fit for these companies because revenue-based lenders make loans based on growth potential and aren’t looking for the level of returns that VCs demand.
2. Business Owners Wanting to Retain Control
Some businesses will grow quickly enough to be courted by VCs but might not like the idea of diluting their equity or giving some degree of control to the VC. With revenue-based financing, you are receiving a loan to be repaid to the lender, which doesn’t require release of an equity stake in your business as is the case with funding from a VC.
3. Businesses Unable to Obtain Other Financing
A revenue-based loan can also be a good option if you don’t 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. Revenue-based financing can help some startups with the growth capital they need to build their businesses more quickly.
How to Get a Revenue-based Loan
It can be difficult to find a lender that offers revenue-based financing rather than more common financing options. Revenue-based business loans are only offered by niche lenders who, in many cases, only offer this form of financing.
Revenue Requirements
The qualification process is built around what your business revenues currently are and how quickly they are likely to grow. You need to generate at least $15,000 to $30,000 of revenue per month. Your revenues need to be either subscription-based or monthly recurring revenues. Additionally, your gross profit margin needs to be at least 50%.
Funding
You can fund $50,000 to $3 million through a revenue-based loan. Generally, the total funding amount will be between 3x and 6x your monthly revenue. Revenue-based loan providers can lend more than the original loan amount at a later time if your business grows successfully, and you make payments on time. 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 million 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.
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.
Application Process
Once you submit an application online that includes basic business and personal information, the lender verifies your monthly revenue through a review of up to one year of your bank statements.
The application then goes 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. Funding typically occurs within 30 days. If you need funding sooner, there are other fast business loans available.
One revenue-based financing provider, Lighter Capital, offers funding of up to $3 million, 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 2x. You can apply online and receive funding within as little as four weeks.
Differences Between Revenue-based Financing, SBA Loans, and Venture Capital
SBA loans and venture capital are two other types of funding that entrepreneurs can use for financing. There are differences between these funding options and revenue-based financing.
Revenue-based Loans vs 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 repaid with fixed monthly payments amortized over the term of the loan. With revenue-based loans, your payment amount will vary from month to month based on your revenue.
Revenue-based Financing | SBA Loan | |
|---|---|---|
Debt Payments | Variable, a fixed percentage of monthly revenue | Fixed, a set amount of principal & interest |
Primary Underwriting Concerns | Stable monthly revenues | Credit profile |
Collateral | Not generally required | Can be a condition of the loan |
Cost of Capital | 8% to 75% estimated annual percentage rate (APR) | 5.5% to 8% |
Funding Speed | 3 to 4 weeks | 4 to 13 weeks |
Application Process | Less documentation, easier process | More documentation, longer and more complicated process |
Repayment Time Period | 3 to 5 years | 5 to 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
VC firms invest in businesses that can scale, and VCs 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 is probably a better growth capital option.
Revenue-based financing is also a good option for those businesses that are looking to preserve their equity. VCs provide you with growth capital in exchange for an equity stake in your business. In most cases, the VC firm will also insist on asserting some level of control over your business. Revenue-based financing doesn’t result in a dilution of your equity and doesn’t cede any control of your business to the RBF provider.
With this in mind, some of the differences between revenue-based financing and venture capital are:
Revenue-based Financing | Venture Capital | |
|---|---|---|
Debt Payments | Must be made monthly | No payments |
Approval Considerations | Stable MRR High growth potential High margins | Business plan Management team Internal rate of return 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 or decision-making |
Returns | Limited to repayment cap | VCs need to have high returns (as high as 100x) |
Time to Fund | 3 to 4 weeks | At least 3 to 6 months |
Bottom Line
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.
