Revenue based financing, also known as RBF in short, can be described as a kind of loan in which the monthly payments are calculated on the percentage of your company’s sales. Because this fluctuates each month, you’ll need to pay off the remaining balance. In comparison to traditional loans, Revenue based financing is not as popular, and therefore, it is difficult to find companies offering this type of plan.
Example of How Revenue based Financing Works
A revenue based financing is more straightforward than other types of financing, as payments are based on the amount of your revenue. Here’s an example of a monthly payment that would be calculated when you take a loan of $200,000 with a revenue share of 5 %.
| Month | Revenue Earned | Monthly RBF Loan Payment (5%) |
|---|---|---|
| April | $25,000 | $25,000 × 5% = $1,250 |
| May | $20,000 | $20,000 × 5% = $1,000 |
| June | $15,000 | $15,000 × 5% = $750 |
As you can see in the illustration, months that have greater sales result in greater monthly payments that can help you pay off your outstanding balance faster. Since short-term loans typically represent less risk for banks, having a record of high sales can aid you in obtaining better rates.
Revenue based Loans: Rates, Terms & Qualification Requirements
Rates, terms, and conditions for a revenue based loan may differ based on your selected lender. The lenders generally seek to prove that the loan is contributing to the capacity to boost the sales of your business.
For a better idea about what you could expect to see, here are some common figures that you could observe:
Typical Rates & Terms
- Loan Amount: $25,000 – $10,000,000
- Interest Rate: 20% – 40%
- Payment Terms & Fees: 2% – 10% of monthly revenue
- Total Cost of Capital: 1.3× – 1.8× the borrowed amount
- Application to Funding Speed: Approximately 2 – 4 weeks
Typical Qualification Requirements:
- Monthly Revenue: $30,000 – $50,000
- Gross Margin: 50% or greater
- Time in Business: 6 months or more
Advantages and Disadvantages of Revenue based Financing
Advantages
- Business owners do not need to give up equity in exchange for business funding.
- Monthly payments are based on revenue, helping to manage cash flow fluctuations.
- Easier access to funding for startups or businesses with poor credit.
Disadvantages:
- Businesses with low revenue may struggle to qualify.
- Harder to find revenue-based financing compared to traditional loans.
- Generally, more expensive than traditional loans due to higher fees and capital cost.
Who Should Consider Revenue based Financing?
Because payments are contingent on a certain amount of sales, the main benefit of revenue-based financing is that it doesn’t impact the cash flow of your business. Due to this, it’s a great alternative if you have fluctuations in revenues. The most common scenarios are:
Seasonal Businesses
Seasonal businesses could have difficulty making payments on a traditional loan during inactive months, when income is minimal or nonexistent. A revenue-based loan, however, can not affect the business’s operations as it will enable lower monthly payments during the off-season and greater repayments being made during the busier months of the peak season.
Businesses With a Subscription-based Revenue Model
Companies generating a large amount of revenue through subscription-based models may experience changes in sales when customers decide to discontinue their subscription. This is particularly true when subscriptions are offered on a short-term basis and do not require a minimum commitment.
In this situation, revenue-based financing can ensure that your company’s cash flow is not significantly affected when a substantial percentage of customers decide they do not require or want the company’s services or products.
Also read: What is an Auto Equity Loan? Benefits, Risks, and Alternatives
Differences Between Revenue based Loans, SBA Loans & Venture Capital
Small Business Administration (SBA) loans and venture capital are the two most popular financing options. and building healthy habits, what revenue based financing compares to other options, and then an in-depth look at these alternatives.
Typical Loan Rates & Terms
| Feature | Revenue Based Financing | SBA Loans | Venture Capital |
|---|---|---|---|
| Funding Amount | $25,000 – $10 million | Up to $5.5 million | $100,000 – $25 million |
| Interest Rate | 20% – 40% | 5% – 15% | N/A |
| Repayment Term & Schedule | 2% – 10% of monthly revenue | Monthly, up to 25 years | No monthly payments required |
| Application to Funding Speed | 2 – 4 weeks | 30 – 90 days | 3 – 6 months |
| Collateral | Not required | May be required | Not typically required |
| Documentation Requirements | Low | High | High |
| Prepayment Penalty | None | Yes | N/A |
| Business Control | No loss of control | No loss of control | Must give up some equity |
Typical Qualification Requirements
| Requirement | Revenue Based Financing | SBA Loans | Venture Capital |
|---|---|---|---|
| Monthly Revenue | $30,000 – $50,000 | $0 – $15,000 | None (must have high growth potential) |
| Time in Business | 6+ months | 6+ months | None |
| Credit Score | None | 680 | None |
Final Remarks
Revenue based financing could be a good option for business owners concerned that taking on new debt might impact their company’s cash flow. While traditional loans could have fixed monthly payments, regardless of your business’s financial situation, Revenu based loans provide lower payment amounts during times of lower revenues.
FAQs: Revenue Based Financing
What is Revenue-Based Financing (RBF)?
Revenue-Based Financing (RBF) is a loan where your monthly payments are a percentage of your revenue, making repayments flexible and proportional to business performance.
Is Revenue-Based Financing expensive compared to traditional loans?
RBF usually has higher interest rates (20%–40%) and fees compared to traditional loans, but it offers flexibility and lower cash flow risk.
Are there any prepayment penalties with RBF?
Most RBF lenders do not charge prepayment penalties. Some even provide a discount for early repayment, encouraging faster loan closure.
Is Revenue-Based Financing suitable for seasonal businesses?
Yes. RBF is perfect for seasonal companies, as payments fluctuate with revenue, reducing the burden during off-season months.
Leave a comment