What is revenue-based financing?

Revenue-based financing - also known as royalty-based financing - is an agreement that allows businesses to raise capital by pledging a percentage of their revenue back to the investor as regular repayments.

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' 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 - for example, 1.5 - 3x the investment.

Revenue-based business loans are popular as repayments are directly proportional to business success.

For 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' performance - meaning the more successful the business, 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.

How does revenue-based financing work?

Revenue-based financing (RBF) allows businesses to improve cash flow by receiving financial investments. For this reason, it is a popular form of e-commerce finance.

Compared with traditional financing services - such as bank loans - it is a relatively simple financial transaction and offers access to immediate funds once documents are signed. RBF agreements typically only require the investor to review the financial history of the business for approval.

The investor and borrowing business simply need to agree on:

• The investment amount
• The repayment amount (often a multiple of the initial investment)
• The repayment figure (a percentage of the business' revenue)
  

The repayment plan is then simple, with the business pledging a percentage of its revenue each week or month until the agreed repayment amount is met.

Find out more about the financing services available to e-commerce businesses - including invoice financing, which offers immediate access to liquid capital based on accounts receivable, minimizing risk to the borrower - by chatting with our expert team today.

Which businesses benefit from revenue-based financing?

RBF is one of the most popular forms of e-commerce finance, providing a growth capital boost to invest in inventory, staff, marketing, and more. Many businesses turn to RBF as a type of e-commerce working capital solution, as the performance-based repayments are attractive to new businesses and those with seasonal demand.

However, these agreements can benefit a range of businesses - especially small and medium-sized businesses in need of an immediate cash flow boost.

Businesses that work with delayed payment terms often need additional cash flow to cover their own expenses - for example, to manufacturers and logistics partners - in the interim payment period.

Similarly, new businesses or those without predictable performance indicators may benefit from RBF. This is because there are no fixed repayment figures, meaning businesses only make repayments based on their actual performance, not targets or projections. However, new businesses may struggle to qualify for RBF, with lenders typically reviewing financial history in the application process.

For those considering applying for RBF, it is important to understand the pros and cons of the service.

Advantages of revenue-based financing 

Each financing service has benefits and limitations depending on business models, the amount of finance required, and repayment terms.

The advantages of RBF include:

• 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. 

Disadvantages of revenue-based lending  

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.

What types of revenue-based finance are there? 

There are two types of revenue-based loans:

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.

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.

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 e-commerce 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.

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.

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 and perceived risk to the lender, and the amount of finance requested.

Typically, the greater the investment, the higher the percentage of the business' revenue pledged in return. The amount will also increase based on the risk accrued by the lender.

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' revenue - alleviating the risks associated with fixed repayments.

• How much funding can I get?  

The finance amount will depend on the business' 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.

Invoice financing with Stenn

If you're looking for an alternative to e-commerce loans without the risks associated with fixed repayments, Stenn enables financing of invoices for small and medium-sized businesses engaged in international trade with delayed payment terms. 

Work with Stenn to turn unpaid invoices into liquid capital today or find out more about alternative financing options available to your small business in our Resources Hub.
 

About the authors

This article is authored by the Stenn research team and is part of our educational series.

Stenn is the largest and fastest-growing online platform for financing small and medium-sized businesses engaged in international trade. It is based in London, provides financing services in 74 countries and is backed by financial giants like HSBC, Barclays, Natixis and many others.

Stenn provides liquid cash to SMEs within the global financial system. On stenn.com you can apply online for financing and trade credit protection from $10 000 to $10 million (USD). Only two documents are required. No collateral is needed and funds are transferred within 48 hours of approval.

Check the financing limit available on your deal or go straight to Stenn's easy online application form.

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