What is revenue-based financing?

Revenue-based finance (RBF) is a fresh and exciting alternative to traditional, often inflexible funding methods.

Small business owners who get to grips with RBF soon learn that this isn’t just another financial concept that’s been repackaged differently; it's a growth path that truly aligns with the needs of modern companies.

Traditional financing methods, like bank loans or equity funding, have long been the go-to solutions. However, they come with a host of limitations and challenges, such as stringent credit requirements, lengthy approval processes, or the need to relinquish a portion of business control. 

Revenue-based financing sidesteps all these barriers, offering a more flexible and business-friendly approach.

In this blog, we demystify revenue-based financing by breaking down what it is and the benefits it offers, so you can make a more informed decision about a financing option designed to work with your business's unique needs and goals.

What is revenue-based financing? Definition & meaning

Revenue-based financing is a type of funding where businesses access capital from investors in exchange for a percentage of their ongoing gross revenues.

The model stands in contrast to traditional loans that demand fixed repayments regardless of business performance by allowing for repayments that fluctuate in line with your revenue streams.

The structure of RBF is particularly advantageous for businesses that experience seasonal revenue variations or have inconsistent revenue streams, reducing financial strain during leaner periods.

RBF is also a non-dilutive funding option, meaning business owners don’t have to surrender equity or control of their company, a common requirement in venture capital deals.

One key element that sets RBF apart is its focus on revenue potential rather than traditional credit metrics.

This focus makes it an accessible option for many businesses that might struggle to secure funding through conventional channels, particularly those in their growth phase with proven revenue streams but perhaps lacking physical assets or extensive credit histories.

What is the difference between revenue-based financing and a loan?

Revenue-based financing (RBF) and traditional loans might seem similar, but they’re worlds apart when it comes to how they work and what they offer your business. 

With a loan, you borrow a fixed amount of money and commit to regular repayments, whether your business is thriving or hitting a rough patch. The bank doesn’t care if sales are down; those payments are due, come what may.

Plus, you usually need strong credit or collateral to even get in the door.

RBF flips the script. Instead of rigid payments, RBF lets you repay based on your actual revenue.

If you have a stellar month, you pay more; if sales dip, your payment does too. It’s a dynamic, flexible solution designed to grow with you, not squeeze you when you’re down.

And here’s the kicker: RBF doesn’t tie you up with the usual credit checks or collateral demands. It’s all about the potential in your revenue stream, making it an attractive option for businesses with growth on their mind but who don’t want the traditional loan hassle. 

So, while loans lock you into a rigid path, RBF gives you the breathing room to grow on your terms.

What types of revenue-based finance are there? 

There are two types of revenue-based loans:

1. Variable collection 

Variable collection is the most common model. This sees businesses receive an investment that is repaid as an agreed percentage of their revenue every month (typically around 6-12%) until the loan is repaid, plus interest.

In a variable collection agreement, there is no set deadline for when the loan has to be repaid and the business simply repays a sum each month until its debt is paid off.

2. Flat fee 

In a flat fee agreement, the business receives the investment sum and agrees to pay back a percentage of its revenue (typically around 1-3%) each month for a fixed period - often five years.

Flat fee agreements are therefore not determined by the original investment amount, with the business repaying for a set period and incurring the risk of paying more than in a variable collection agreement.

This type of RBF is common among start-ups and new businesses, paying a smaller proportion of their revenue each month and paying greater interest if the business scales significantly over the repayment period.

What are the benefits of revenue-based financing?

A core benefit of RBF is how it seamlessly aligns with a business's financial health.

Tying repayments to revenue eases the burden during slower business cycles, a feature particularly beneficial for startups and SMEs experiencing variable cashflows. 

Having this flexibility allows businesses to navigate the ups and downs of market changes more efficiently without the stress of fixed monthly payments.

Still, RBF's flexibility extends beyond repayment terms; it often comes with fewer restrictions on how the funds can be used compared to traditional loans.

This freedom enables business owners to allocate funds where they're most needed, whether for scaling operations, hiring new staff, or investing in marketing and product development. 

Another significant advantage of revenue-based financing is the speed and simplicity of the funding process.

Unlike the often lengthy and complex processes associated with bank loans or equity fundraising, RBF can provide quicker access to capital.

This is crucial for businesses needing to act fast to seize growth opportunities or address urgent cash flow needs.

Need to weigh the advantages and disadvantages of this financing model? We’ve got you covered.

Revenue-based financing: Pros & cons

Pros of RBF:

• Performance-based: weekly or monthly repayments are directly proportional to the business' revenue, meaning payments are reflective of what the business can afford.
• No fixed repayments: the performance-based model means monthly repayments scale up and down with the business' revenue.
• Modest interest rates: compared with alternative investment services - such as angel investors - the repayment amounts are more affordable.
• Zero collateral: RBF agreements are based on performance and therefore pre-empt that some months may be slower. For this reason, the business does not need to pledge any collateral or assets against the agreements.
• Quick and simple application: compared with traditional loan agreements, RBF agreements are quick to process and businesses can access capital within 48 hours of documents being signed. 

Cons of RBF:

However, all financial services also have potential downsides for businesses.

In RBF agreements, these include:

• Lesser investment amounts: as repayments are performance-based, financing companies are often reluctant to invest larger sums.
• Based on financial history: lenders typically base their offer on the borrowing business' financial history, potentially disqualifying some businesses or limiting the amount of finance available.
• Variable repayment periods: as repayments are based on revenue, there are no fixed repayment periods and businesses cannot say for certain when the loan will be repaid.

‍How does revenue-based financing work?

1. Demonstrate revenue generation

Begin by showcasing your business's ability to generate revenue.

Lenders will assess factors such as monthly sales, growth trajectory, and the overall viability of your business model.

Unlike traditional loans, RBF focuses on the potential for future revenue rather than credit scores or asset collateral.

2. Submit financial history for review

To qualify for RBF, you'll need to provide your business's financial history. This typically includes documents that highlight your revenue trends and overall financial health. The investor uses this information to determine if your business is a suitable candidate for RBF.

3. Negotiate terms

Once your business is deemed suitable, you'll negotiate the terms of the financing.

These terms usually include:

• The investment amount you’ll receive
• The repayment amount, which is often a multiple of the initial investment
• The repayment percentage of your business's revenue that you'll pledge to the lender each week or month
• The repayment duration, which ensures the terms align with your business's growth and financial stability

4. Sign the agreement

After agreeing on the terms, you'll sign the RBF agreement.

This step gives you immediate access to the funds, making RBF a relatively quick and straightforward financing option.

5. Repay based on revenue

Repayments are dynamic and adjust according to your business’s income.

During months of higher revenue, you'll repay more; during slower months, your repayments will decrease. This flexibility alleviates financial pressure, allowing your business to sustain operations and grow even during periods of lower income.

6. Monitor and adjust

Throughout the repayment period, monitor your revenue and adjust your business strategies as needed to ensure you can meet your repayment obligations while continuing to grow.

7. Complete repayment

Continue repaying the agreed-upon percentage of your revenue until the total repayment amount is met.

Once completed, your obligation to the lender ends, and you can fully reap the benefits of your business's growth.

What fees are associated with revenue-based financing?

The fees associated with revenue-based financing are simple: businesses pledge a percentage of their revenue each week or month in return for investment. 

As RBF is a performance-based financing agreement, the exact repayment amount fluctuates each month but the proportion of revenues stays the same.

What can impact costs?

The exact details of an RBF agreement depend on various factors, including the financial history of the business, the perceived risk to the lender, and the amount of finance requested.

Typically, the greater the investment, the higher the percentage of the business's revenue pledged in return.

The amount will also increase based on the risk accrued by the lender.

What is an example of revenue-based financing?

As you’ve seen, in a revenue-based financing agreement, an investor pledges a sum to a business in return for monthly repayments that are directly based on the business's revenue.

This means there are no fixed payment figures and repayment installments fluctuate alongside business performance, peak trading periods, and more.

Repayments typically continue until a pre-agreed sum is paid in full. This figure is often calculated as a multiple of the initial investment.

Take this example. 

E-commerce Ltd. lacks the liquid capital to fund its own accounts payable and growth, so it decides to raise funds by accessing revenue-based financing. 

Investor Co. pledges $100,000 (USD) for an agreed return of three times the investment figure ($300,000) in monthly installments of 5% of E-commerce Ltd.'s revenue - until the repayment figure is paid in full.

As per a standard revenue-based financing agreement, these monthly repayments are based on the business's performance – meaning the more successful the business is, the larger the monthly repayment figure.

The first three months of the agreement look like the following:

• Month one: revenue $100,000 - repayment $5,000
• Month two: revenue $150,000 - repayment $7,500
• Month three: revenue $50,000 - repayment $2,500

E-commerce Ltd. continues to repay Investor Co. at an average monthly repayment of $5,000 (with the exact figure fluctuating each month) and repays the agreed figure of $300,000 after 60 months.

Once this final repayment is made, the debt is settled and there are no further long-term repayment fees.

Who can benefit from revenue-based financing? 

RBF is particularly suitable for businesses with regular, predictable revenue streams, including companies in sectors like technology, software-as-a-service (SaaS), eCommerce, and other digital services.

These businesses typically have recurring revenue patterns that are more predictable and consistent financial models, making them ideal candidates for RBF.

Businesses looking to scale operations, invest in marketing, expand their product lines, or manage cashflow fluctuations will find RBF especially advantageous.

The approach provides the necessary capital to invest in growth initiatives without the pressure of fixed monthly repayments, which can be a lifeline for businesses during critical growth phases or when navigating uncertain economic conditions.

Alternatives to revenue-based financing 

Businesses may benefit from alternative financing agreements depending on the investment amount, repayment models, and whether or not they would qualify for alternative loan agreements.

Some common alternative loans for eCommerce businesses include: 

Debt financing 

Debt financing is similar to RBF in that it allows businesses to access an initial investment sum.

However, debt financing is more like a traditional loan in that the business is expected to repay the investment at a fixed sum each month - paid in full - that is not related to its performance or revenue.

Another way debt financing differs from RBF is in its collateral requirements - often requiring a personal guarantee against the loan.

Equity financing

Similar to RBF, equity financing acts as a vehicle for businesses to access growth capital and investments are driven by performance.

The exact repayment structure differs from a royalty-based finance agreement, though.

In an equity financing agreement, the borrowing business agrees to hand over a share of its ownership to the investor.

This model is therefore more complex for the business, which agrees to more than just repayments - giving the investor a stake in decisions and more.

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Are your numbers giving you a headache? This article might be your painkiller: What is the debt-to-equity ratio? How to fix it and secure funding.

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Invoice financing 

Invoice financing is similar to RBF in that it gives small and medium-sized businesses immediate access to liquid capital to fund growth.

However, the two agreements differ in their loan models. In an invoice financing agreement, the business is effectively advancing money it is already owed - submitting unpaid invoices to be paid immediately in exchange for a small fee.

If you are interested in overcoming cash flow interruptions, this video explains how invoice financing works in under three minutes:

Invoice Financing explained

Revenue-based finance: frequently asked questions (FAQs)

Is revenue-based financing risky?

Revenue-based financing agreements are directly based on performance, with the borrowing business paying back a percentage of its monthly revenue. This protects businesses against the risks associated with fixed monthly repayments, which can be risky during slow periods.

Is revenue-based financing a loan? 

Revenue-based financing is similar to a loan, with businesses receiving an investment sum and making regular repayments.

However, unlike traditional loans, RBF agreements are performance-based. This means repayments are directly proportional to the borrowing business's revenue, alleviating the risks associated with fixed repayments.

How much funding can I get?

The finance amount will depend on the business's financial history. Investors will review the applicant's finances to determine how much they're willing to loan and the repayment terms.

Businesses must remember that the greater the finance amount, the larger the performance-based payment installments and total repayment figure are likely to be. This is because the repayment fees are designed to reflect the risk undertaken by the lender.

How long does it take to apply?

Unlike traditional loans, alternative financing is quick and simple to apply for, with businesses often receiving funds within 48 hours of a successful application.

Does my business need to be making a profit? 

Lenders typically review a business' financial history before offering RBF services. For this reason, businesses are likely to be required to be profitable, as repayments are directly based on their revenue.

How can I apply? 

To qualify for alternative financing services, businesses should go directly to a revenue-based financing company. Applications are often simple to complete and, depending on the service, businesses may have to submit financial records. 

Compared with traditional bank loans, alternative financing services are quick and simple to apply for and funds are often paid within 48 hours of a successful application.

Need fast funding? 

Stenn’s revenue-based financing delivers just that. Get cash in hand within 24 hours—no personal credit checks, no equity lost.

Our financing adapts to your business, letting you repay based on your revenue. Whether you’re scaling your eCommerce or expanding your SaaS offering, we’ve got the capital to match your growth.

Simple application, with swift approval, and funds you can use however you choose. Say goodbye to rigid loans and hello to the financial flexibility your business deserves.

Ready to fuel your growth? Get funded with Stenn now.