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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 two 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 between $50,000 and $3 million, 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.
Typically, companies can borrow up to a third of their annualized revenue run rates, or around four to seven times their MMRs.
How much does it cost?
Instead of charging interest, RBF providers multiply your loan amount by a number called a repayment cap, often between 0.4x and 2x. That means that your business pays between 0.4 and two times the amount that it borrows when it takes out a revenue-based financing loan, no matter how much time it takes to pay it back.
Monthly repayments and loan terms
The monthly repayment percentage runs between 2% and 3% of your business’s monthly revenue, though it can sometimes get as high as 10%. The more money your business brings in each month, the faster it pays off the loan.
Revenue-based financing usually comes with longer terms, running between three and five years. Your business needs to pay off the loan within the loan term, regardless of how much money it actually brings in. And unlike with business term loans that come with interest, your business won’t be able to save by paying off the loan early.
Top 3 revenue-based financing providers
Thinking of RBF instead of investor funding? You might want to start by looking at these three providers.
Loan amount | $50,000 to $3 million | $200,000 to $1 million | $2 million to $15 million |
Percentage of revenue you can borrow | Up to 33% of your annualized revenue run rate | Up to 6x MRR | 4x to 7x MRR |
Repayment cap | 1.35x to 2x | 0.4x to 0.6x | Charges interest of 10% to 12%, plus a 1% annual fee |
Monthly percentage | 2% to 10% | 3% to 8% | Varies |
Term | Three to five years | Three years | Three years |
1. Lighter Capital
Lighter Capital is an RBF lender that specializes in funding for tech startups. Its RBFs work something like a fixed term loan and a line of credit — after you’ve paid off your first loan, you can apply for another round of funding. It’s designed to be an alternative to venture capital funding when your business is still in its early stages.
Your business must be in the software, digital media, tech services or other similar industry to qualify. It also must be based in the US, have at least 10 clients and make at least $15,000 in MMR or $200,000 annually.
While it doesn’t need to be profitable, it must have gross margins of at least 50%. This means that its revenue is at least 50% higher than the cost of production.
Typically, it takes four weeks to get your initial funding. If your business needs additional funds, you can apply to get another round in as little as three or four business days.
2. GDS Capital
GDS Capital is an RBF provider aimed at helping startups in their early stages, before they’re able to qualify for venture capital funding. Its offerings are limited — it works primarily with software as a service (SaaS) companies in the Mountain West: Utah, Montana, Arizona, Nevada, Colorado, Idaho, New Mexico and Wyoming. However, it’s also willing to work with non-SaaS businesses that have strong gross margins.
There’s no set minimum annual or monthly revenue, though you’ll need to make at least $33,333 in MRR to qualify for the lowest amount of funding available. Typically, it takes up to 30 days to get your funds.
3. SaaS Capital
SaaS Capital offers RBFs that work more like a revolving line of credit to SaaS companies with high revenue. It works by giving your startup access to between $2 million and $15 million, which it can withdraw from for two years. Each draw is turned into a three-year term loan, and any principal that’s repaid can be borrowed from again.
To qualify, your business must be a SaaS company that makes at least $200,000 in MRR. It’s available to businesses in the US, Canada and the UK.
Compare more business loan providers
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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 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.
Bottom line
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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