Revenue-Based Financing: What It Is, Pros, Cons
Revenue-based financing can provide capital to high-growth companies, but may not be the best fit for other startups or small businesses.
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Lead Writer Revenue-based financing has become a popular funding method for growing startups, especially software-as-a-service (SaaS) companies. An alternative to debt or equity financing, it can be a good choice for businesses that are unable to access traditional funding options.
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Revenue-based financing is a type of funding in which investors provide capital in exchange for a percentage of your business’s future revenue.
Unlike traditional business loans, payments fluctuate based on revenue and there’s no fixed monthly payment or accruing interest. Instead, the total repayment amount is determined using a repayment cap. And unlike equity financing, investors don’t take ownership in the business.
Revenue-based financing, at a glance
- Repayment: Based on a percentage of your revenue.
- Interest: No traditional interest rate.
- Total cost: Set by repayment cap.
- Term length: Varies (often no fixed end date).
- Ownership: No equity given up.
- Also known as: Revenue-based lending, royalty-based financing or revenue-based investing.
How does revenue-based financing work?
1. You receive an upfront investment.
An investor or financing company gives you a lump sum of capital. Examples of top revenue-based financing companies include:
- Founders First Capital Partners.
- AltCap.
- Flow Capital.
- Uncapped.
2. A repayment cap is set.
Instead of traditional interest, the lender applies a repayment cap (similar to a factor rate). Repayment caps vary by company, but they typically range from 1.2 to 3.0.
3. Your total repayment amount is calculated.
You’ll multiply the repayment cap by the original investment amount to get your total repayment amount.
Example:
- You receive an investment of $100,000.
- Your repayment cap is 1.2.
- Your total repayment amount equals $100,000 x 1.2, which is $210,000.
- This means you’ll continue paying a percentage of your monthly revenue until the full $120,000 is repaid.
4. You repay with a percentage of your monthly revenue.
The lender collects a fixed percentage of your monthly revenue — often called a revenue share — until the agreed-upon total is repaid. This percentage typically ranges from 1% to 15%, though some lenders may go as high as 25%. The exact rate is based on your business’s revenue and expenses.
5. The loan ends when the cap is reached.
Because payments fluctuate with revenue, many revenue-based loans don’t have a set end date. Some companies, however, may offer terms, similar to a traditional loan. Flow Capital, for example, offers terms from two to four years.
Pros and cons of revenue-based financing
Pros
- Accessible to borrowers who can’t get traditional financing. Because these loans are repaid with your future revenue, lenders are less likely to rely on personal credit, collateral or time in business when underwriting your application.
- No fixed monthly payment. Unlike traditional loans, payments for revenue-based financing fluctuate based on the revenue you generate. You’ll pay more when sales are strong and less when things are slow.
- Maintain ownership of your business. You don’t have to give up equity to get revenue-based financing.
Cons
- Can be expensive. If you have a $100,000 loan with a 1.2 repayment cap, you’re paying $20,000 in fees. Since you’re repaying a multiple amount of what you borrowed, this may be more expensive than a more traditional loan.
- Can impact cash flow. Each month, a percentage of your sales will go toward repaying your loan, which can eat into your cash flow. If you have high monthly expenses, it may be difficult to manage them along with this type of repayment.
- Need revenue to qualify. Pre-revenue startups will not be able to access this type of financing. Since repayment is based on your revenue, you’ll need to show strong sales to qualify. Founders First Capital Partners, for instance, requires $500,000 in annual revenue and Flow Capital requires at least $3 million.
Who should get revenue-based financing?
Revenue-based financing may be a good fit for:
- High-growth businesses.
- SaaS or recurring-revenue businesses.
- Businesses with strong revenue but poor credit.
- Founders that don’t want to give up equity.
It may not be the right fit for:
- Pre-revenue startups.
- Seasonal businesses or those with inconsistent revenue.
- Companies with tight margins.
Alternatives to revenue-based financing
If you don’t think a revenue-based loan is right for you, consider these alternatives:
Invoice factoring
Best for: Business-to-business companies with capital tied up in unpaid invoices.
AltLINE AltLINE - Invoice factoring
Max Loan Amount
$5,000,000 With invoice factoring, you receive a lump sum of capital in exchange for selling your invoices at a discount. The factoring company takes responsibility for collecting repayment on your invoices.
Because underwriting is largely based on the creditworthiness of your customers, this can also be a good option for borrowers who can’t qualify for traditional financing.
Online term loan
Best for: Specific investments in your business.
Fora Financial Fora Financial - Online term loan
Max Loan Amount
$1,500,000 Many online lenders have flexible qualification requirements and can work with startups or borrowers with bad credit. If you need to make a specific investment in your business, such as buying inventory, hiring new employees or launching a marketing campaign, an online term loan can be a good option. Plus, online lenders can often issue funding within one to two business days.
Business line of credit
Best for: Working capital, emergency expenses.
Bluevine Bluevine - Line of credit
Max Loan Amount
$200,000 A business line of credit functions similarly to a credit card — it’s revolving and you only pay interest on the money you draw. As soon as you pay back what you’ve borrowed, you can pull on the line again.
Lines of credit can be useful for managing short-term cash flow needs, as well as covering emergency expenses.
SBA microloan
Best for: Traditionally underserved businesses.
U.S. Small Business Administration SBA microloan
Max Loan Amount
$50,000 If you can’t qualify for traditional business loans, you might consider an SBA microloan. These loans are available in smaller loan amounts (up to $50,000), but still offer competitive rates and repayment terms.
SBA microloans are issued by nonprofit and community lenders who specialize in working with underserved businesses, like startups and those with bad credit. These organizations typically offer business training and educational resources in addition to funding.
➡️ Want to consider other more traditional financing options? Check our list of the best small-business loans.
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