Revenue-Based Financing Explained for Small Business Owners
As a small business owner, you may be thinking about buying software or investing in an ad campaign. However, there might be a short window to these investments–such as a big sale–meaning you will need the money immediately.
Getting a traditional bank loan or debt financing can take weeks, if not months, and equity financing through investors might be too complicated at this stage. In this case, revenue-based financing (RBF) can be a viable option for your business.
RBF depends on your monthly revenue instead of a fixed amount. Because of its flexibility and simpler application process and requirements, it’s becoming a popular choice for many entrepreneurs. According to a 2024 report, the global RBF portfolio from Community Development Financial Institutions was worth about $50 million in 2023, and may be doubled in 2025.
With its growing popularity, several laws have been passed to regulate this form of financing. For example, Virginia signed a law in 2022 that requires revenue-based loan providers to register and disclose deal terms like fees and finance charges.
In this article, you’ll learn more about:
What revenue-based financing is and how it works
How it differs from traditional loans
Its advantages and disadvantages
How to determine if RBF is right for your business
What Is Revenue-Based Financing?
In revenue-based financing (sometimes called royalty-based financing), a lender gives you a lump sum upfront in exchange for a percentage of your future revenue. The total repayment value includes a multiple of the principal amount (or factor rate), which aggregates total costs and fees. For example, if you took out a $200,000 loan with a 2x multiple, your maximum payment would be $400,000.
In general, there are no set repayment terms, unlike most small business loans and traditional debt products. Instead, you can negotiate with the lender to establish how much you pay and how often you pay.
The repayment amount depends on your monthly gross revenue. If you have higher revenue, you pay more, which shortens your repayment time. If you have lower revenue, you pay less and extend your repayment time.
One advantage to this type of financing is that you’re not forced to repay a fixed amount when you can’t afford it. Plus, if you happen to have higher-than-expected revenue, the lender can’t collect anything over the maximum payment.
Additionally, because the main eligibility requirement is your monthly revenue, this funding doesn’t require collateral or interest payments. This means that there’s less paperwork and a much faster approval process.
Typical eligibility requirements include a specific monthly recurring revenue (MRR) and months of operation, which depend on the lender. Some lenders can also require credit scores.
It’s important to note that RBF is not the same as a merchant cash advance (MCA) even though they both give out lump sums in advance and payments are based on future revenue. The main difference is that MCA payments are automatically deducted from credit and debit card sales/transactions.
How Does Revenue-Based Financing Work?
The provider takes a look at your bank statements to determine how much to lend you. Based on this information, they can also calculate how long it will likely take for you to repay. These estimates are part of their risk management and approval process.
Let’s say you got approved for $200,000 with a 1.5x multiple (or factor rate), and you agreed to pay back 5% of your monthly revenue. Your payments could look like this:
Total repayment value: $300,000
Month 1: Your revenue hits $50,000, so you’ll pay $2,500.
Month 2: Your revenue hits $80,000, so you’ll pay $4,000.
Month 3: You did not have any sales, so you’ll pay $0.
This keeps going until you’ve repaid the full amount. To help you manage your cash flow better, many lenders have flexible repayment schedules, including weekly and daily.
Businesses That Benefit From Revenue-Based Funding
Business owners often turn to RBF if they want to get capital for short-term expenses, like hiring temporary workers or buying equipment. In general, this type of funding is not ideal for new or early-stage businesses or companies with low gross margins.
Here are some businesses that benefit the most from RBF:
Software-as-a-service (SaaS) and subscription businesses: SaaS companies often have predictable MRR due to their subscription models. They can use the money for marketing and ads to boost their customer base or invest in product development without relying on growth capital.
E-commerce and direct-to-consumer companies: While sales can be pretty unpredictable, the sales cycles/periods remain the same. These businesses can use funds to boost inventory during peak seasons like holidays or buy more service vehicles to support a surge in orders.
Growing startups: These companies often need to scale up quickly to grab market opportunities such as office and product expansions. They can use the money to quickly launch new offerings or as a capital buffer while they wait for the next round of investments.
Revenue-Based Financing vs. Traditional Loans
Traditional or term loans often have stricter requirements and repayment terms because they screen for applicants with the lowest risk of defaulting. Here are the main differences between RBF and traditional debt financing:
Repayment structure: RBF is based on revenue, while term loans are based on fixed monthly payments.
Factor rates vs. interest rates: RBF has a factor rate, which includes one-time fees and costs., Traditional loans have fixed or variable interest rates, which is the annual cost of borrowing the principal amount.
Eligibility: RBF focuses on cash flow and sales history, while conventional loans require strong credit scores and financial statements.
Application and approval time: RBF applications can often be done online with a decision made within 24 hours. Meanwhile, traditional bank loans can take months because of strict underwriting processes.
Advantages and Disadvantages of Revenue-Based Financing
Flexibility is the main reason small businesses consider this type of funding. Other benefits include:
No fixed payments: Payments adjust to your sales and not the other way around. You can also end up paying off the amount much earlier if your growth accelerates.
No collateral and personal guarantees: There are no risks of losing your home and other business or personal assets.
Faster approval time and release of funds: There’s less paperwork because financial statements, collateral processing, and business plans are not required.
Non-dilution: You remain in control of your business because lenders don’t take ownership of your company (unlike venture capital investments and other equity financing).
No fund restrictions: You’re free to use the money any way you want.
However, there are also some potential drawbacks:
Higher total repayment amount: You could end up paying more than with other short-term financing options because of the fees, especially if it will take you longer to repay.
Requires consistent revenue growth: If you experience a sales slowdown for consecutive months, your repayment terms will be extended.
Lower loan amounts: The amount can be much smaller than what you might get from other funding options.
No federal regulations: Since RBF is not a loan, it’s not covered by usury and unfair lending laws.
Should You Apply for Revenue-Based Financing?
Before hitting that apply button, it’s important to first evaluate how much funding you need and whether you have a solid repayment plan. Compare with other financing options, like term loans or business lines of credit, to determine which one will save the most on fees and costs.
To recap, while this funding option is very convenient and has lower barriers to entry, it’s best if:
You have steady and growing revenue streams.
You can pay off the loan relatively quickly.
You want more control over your cash flow.
You don’t want to lose ownership of your business.
You need the funding immediately.
Get Stress-Free Funding With Backd
Revenue-based financing can help small businesses quickly expand, but it’s not the only short-term option for entrepreneurs. For example, Backd’s Business Line of Credit and Working Capital Advance can offer the same convenience and flexibility at competitive rates.
Backd offers up to $2 million in funding with the Working Capital Advance and up to $750,000 with the Business Line of Credit. Only a soft credit pull is run when you apply, so it doesn’t affect your credit score.
The eligibility requirements include:
$100,000 in monthly revenue
625+ credit score
Established business credit
Based in the U.S. with a brick-and-mortar address
Been in business for one year for the Working Capital Advance and two years for the Business Line of Credit
Apply now for stress-free and flexible funding.
