What is Revenue-Based Financing? How Does It Work?

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Revenue-based financing (RBF) is a way for small and startup companies to raise money for growth. It is a hybrid of borrowing money and selling stock, yet it is not wholly either. Instead, it is a way to “sell” some of your future revenues in order to receive an upfront cash advance. The amount you have to pay back and the time it takes to pay off the advance determines the imputed interest rate of the deal.

How Does Revenue-Based Financing Work?

A RBF deal specifies the following:

  • Principal amount. The cash advanced by the RBF provider to the borrowing company.
  • Repayment cap. The amount the borrower will have to repay, expressed as a multiple of the principal amount. For example, a cap might be expressed as 1.5X the principal amount.
  • Monthly repayment percentage. The percentage of gross monthly revenue the borrower will pay to the RBF provider. This is a fixed percentage of a variable amount (i.e., monthly revenues), which means the amount paid out will be higher during months when revenues are strong and lower when revenues are weak.
  • Term. The time it takes to repay the loan is usually expressed in a range, say four to six years, because it will vary with monthly revenue cash flows.
  • Minimum required monthly revenues. RBF providers will want to see a revenue history that meets or exceeds a provider-set minimum revenue target over the past 12 months.

As an example, suppose you have a startup company that sells software as a service (SaaS) to subscribers. You haven’t yet established a good credit score and don’t have many physical assets to use for collateral, yet you have a fairly steady income stream from your monthly subscribers. In this example, that income stream averages about $35,000 per month. The RBF provider is willing to advance a principal amount of $100,000 with a repayment cap of 2X. That means your company will have to repay a total of $200,000. The monthly revenue percentage is set at 8%, meaning your average repayment amount is 8% x $35,000, or $2,800/month. The term is set at six years, and any unpaid amount at the end of the six-year term is due in a single balloon payment.

Revenue-Based Financing Rates and Terms

The following table summarizes the average rates, terms and features of RBF:

Principal AmountUp to 33% of annual sales, up to $1 million
Repayment Cap1.5X - 3.0X of the principal loan amount
Monthly Repayment Percentage3% - 8% of monthly sales
Term3 - 6 years
Minimum Required Monthly Revenue$15,000/month over the past 12 months
FeesMinimal, usually just reimbursement of legal fees
Tax DeductibleYes, if structured properly
Balloon PaymentIf necessary, at end of term
Personal Liability of Owners/PartnersNone
Funding Speed3 - 4 weeks
Collateral RequiredNo
Prepayment PenaltyNo

Why Would a Business Consider Revenue-Based Financing?

Many small companies seeking cash for growth might find it hard to arrange traditional financing (that is, a loan or a stock sale). For example, a business might not qualify for a bank loan because it has a scant credit history, a poor credit score, or doesn’t have sufficient tangible assets to use as collateral. RBF typically does not involve personal repayment pledges or the use of personal collateral. Even if it does qualify for a loan, a business might not like the strings attached, such as covenants that restrict how it operates. For example, the lender might require that the business maintain a debt/equity ratio under 50% until the loan is repaid.

Another traditional alternative, selling a portion of the company to one or more investors, might be unappealing because the owner of the business might not want to dilute stock ownership or give control to outside investors. Even if that isn’t the owner’s concern, the company might find itself too far along for angel investors and not mature enough for venture capitalists, making the prospect of selling shares to an outside investor problematic.

How to Qualify for Revenue-Based Financing

Not every small business will qualify for RBF. These are typical requirements a small company and its owner must meet:

  • Your FICO score should be at least 550.
  • You will need reliable documentation disclosing your monthly gross revenues (sales) over the past year.
  • Your minimum gross margin should be 50%.
  • You will be able to borrow no more than 1/3 of your annual gross revenue.
  • You will not need to be profitable, but you must show reliable income of at least $15,000 per month.
  • You will need to specify how you’ll use the advance; RBF providers want the money to be used to grow the company.
  • You will need a business checking account set up so that the RBF provider can electronically withdraw your monthly payments.

Where to Get Revenue-Based Financing

RBF providers are usually specialized commercial lenders. Some are set up only for certain types of businesses, such as subscription-based ones (SaaS, periodicals, etc.), while others are open to financing any business meeting its revenue and other requirements. The following table lists three of the leading RBF providers.

ProviderLoan AmountsRepayment CapMin. Monthly RevenueMonthly %Term (Years)
Lighter CapitalUp to $500K1.35X - 1.80X$15K2% - 8%3 - 5
GSD CapitalUp to $1M1.0X - 1.5X$30K2% - 8%Up to 4
SaaS Capital*Up to $15MN/A$200K0.8% - 1.1%2

*SaaS Capital offers RBF revolving loans with fixed interest rates

Other ways to raise cash include:

  • Loans from banks, credit unions, commercial lenders, crowdlenders, peer-to-peer lenders.
  • SBA-guaranteed loans.
  • Credit card cash advance.
  • Equity capital from an angel investor or venture capital firm.
  • Invoices sold to a factoring company.
  • Personal guarantee business loan.
  • Secured business loan.