What is revenue-based financing?
Funding for startups and high-growth businesses that don't want to give up ownership to investors.
When your small business or startup is growing quickly and needs funding to keep up, you might want to look into revenue-based financing (RBF). This option allows your business to borrow against future revenue and usually comes with a flexible repayment schedule.
Lenders often present RBF as an alternative to equity funding, meaning you won’t have to give up ownership in your company. But it can cost more than your traditional business loan.
Revenue-based financing at a glance
Also known as royalty-based financing, RBF is a type of business loan designed to give high-growth businesses access to the capital it needs to continue growing.
RBF is similar to a merchant cash advance with 2 major differences. First, the funding amounts are typically higher than a merchant cash advance. Second, repayments are based on revenue rather than sales. In other words, you don’t need to be a consumer-facing business to benefit from revenue-based financing.
It’s designed to meet the needs of startups and small businesses that are growing quickly and don’t necessarily have access to traditional term loans or lines of credit. Your business can use it for sales expansion, product development, bringing on new staff and other costs associated with growth.
How does RBF work?
RBF works by providing a fixed amount of funding, which your business repays, plus a fee, with a percentage of its monthly revenue. Often, RBF lenders make it easy for startups to quickly qualify for more funding after they’ve paid off their first loan.
How much can I borrow?
Businesses can typically borrow around $50,000 up to several million dollars, depending on their annualized revenue run rate or monthly recurring revenue (MRR). An annualized revenue run rate is how much your business expects to make in the future based on past revenue. An MRR is how much your business has consistently made over the past few months.
Companies are often able to borrow up to 1/3 of their annualized revenue run rates, or around 4-7X their MMRs.
How much does it cost?
Similar to lending based on your business’s revenue, RBF providers also base repayment on a percentage of what your business makes over a certain time period. Often this percentage runs between 3% and 15%.
However, RBF providers also place a limit on how much you end up paying above your original loan amount. This is called a “repayment cap” and usually runs between 1.35X and 3X the amount of your loan – that means your business could end up repaying multiple times what it borrowed.
Revenue-based financing usually comes with longer terms, running between 3-5 years. Your business needs to pay off the loan within the loan term, regardless of how much money it actually brings in. Because providers are entitled to a portion of your revenue over a set time period, you won’t be able to save by paying off the loan early like you can with a business term loan.
RBF financing can be expensive, but it may be one of the few loan options available to start-ups and high-growth small businesses that don’t qualify for traditional bank loans.
Top revenue-based financing providers
Thinking of RBF instead of investor funding? You might want to start by looking at these 2 providers.
|Decathlon Capital Partners
|Up to $4 million
|$500,000 – $10 million
|Percentage of revenue
you can borrow
|Varies but is typically 10-30% of annual revenue
*The above details are accurate as of October 2019.
TIMIA Capital offers RBF to SaaS (software as a service) companies with between $2 and $20 million annual recurrin revenue (ARR). Companies can receive up to $4 million in growth funding within 1 month, or between 6X and 12X MRR. Loans are repaid in 4-8 years at a fairly low interest rate of 1-4% with a repayment cap of no more than 2X the loan amount.
To qualify for financing, businesses must be based in Canada and the US, generate more than $120,000 MRR, have at least 10 clients and have a gross margin of 50%. Your business does not have to be profitable, but you’re expected to have a solid growth plan in place to become so. (These details are accurate as of October 2019).
Decathlon Capital Partners
In contrast to TIMIA’s industry-specific focus, Decathlon Capital Partners offers revenue-based financing to companies across a wide range of industries in both the US and Canada. Loans range from $500,000 to $10 million and are repaid over 2-5 years with monthly payments equaling 1-4% of a company’s monthly revenue.
Decathlon deals with businesses that make between $4 million and $100 million annually. After an application has been submitted and approved, it usually only takes between 3 and 4 weeks to close the deal and move forward with financing. Personal guarantees are not required, however, company assets may be needed to secure the loan. Exact application requirements are determined on a case-by-case basis. (These details are accurate as of October 2019).
Compare more business loan providers
What types of businesses can benefit from revenue-based financing?
While any small business or startup might be able to find revenue-based financing, most lenders specialize in the tech industry. This is because SaaS (softare as a service) companies often have trouble qualifying for nonequity funding.
Startups that plan to see a large increase in revenue in the near future might find RBF useful. These companies might not qualify for venture capital financing yet, but still need funds to continue growing.
Other small businesses that aren’t tech startups might be able to benefit from revenue-based financing when traditional business loans or merchant cash advances fall short. That’s because RBFs are typically available in larger amounts than merchant cash advances and come with more flexible repayments than traditional business loans.
Can my business qualify for revenue-based financing?
Typically, you or your business will need to meet the following requirements to be eligible for RBF:
- Your business makes at least 50% more than it spends on production
- Your business has an MRR of at least $15,000
- Have documentation of your business’s recent gross revenue sales
- Have a plan for how your business intends to use the funds
What are the benefits?
- Keep control of your business. You won’t have to give up equity or board seats to get access to this kind of funding.
- Available to startups. In fact, RBF is designed as an alternative to venture capital funding for startups that need access to large amounts of money to grow.
- Flexible repayments. Repayments are based on how much you make each month, not a fixed amount like with traditional term loans.
- No collateral or personal guarantee. In addition to not requiring collateral, RBF providers also usually don’t ask owners to put their assets on the line with a personal guarantee.
What are the downsides?
- It’s expensive. Compared to traditional term loans and lines of credit, RBF typically isn’t cheap.
- Fees. In addition to the repayment cap, your lender might charge closing fees or an annual fee for access to funds.
- Not for brand-new businesses. While RBF might be designed for businesses that are still in the startup phase, many providers ask to see at least a year of monthly revenue.
- You might borrow more than you can afford. Annualized run rates can be affected by large one-time profits that won’t necessarily be reflected in future revenue.
Revenue-based financing could be a good alternative to venture capital for tech startups that aren’t able to qualify for equity funding or don’t want to give up ownership of their company. It could also be useful to other small businesses that need money for growth, but can’t get a term loan or line of credit.
However, it’s expensive and you could end up taking on more than you can afford if a large, one-time profit skews your revenue projections. Curious about your other financing options? Read our business loans guide to find more ways to fund your company and compare lenders.
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