What is Revenue-Based Financing?
Revenue-based financing, also known as royalty-based financing, is a financing model in which businesses secure capital from an investor in exchange for a portion of the business’s monthly revenues. Usually, this amount will be a fixed percentage of the business’s revenues.
Naturally, that means that the business will pay more on months when generated revenues are higher, and less when revenues dip. This makes revenue funding optimal for business owners with strong—but fluctuating— gross revenues, or those with highly predictable revenues.
An increasingly popular form of funding, revenue financing is especially popular with tech companies and B2B software-as-a-service (SAAS) companies in particular, as such companies often have subscription-based sales.
Before we delve further into the pros, cons, and eligibility requirements of revenue-based lending, let’s look at the differences between revenue loans and equity or debt-based loans.
Revenue-Based Funding vs. Other Forms of Funding (Debt and Equity)
As mentioned above, revenue financing differs from both equity financing—including venture capital, growth capital and angel investing—and debt financing in notable ways.
Unlike traditional debt financing loans, which typically require fixed monthly payments and a set interest rate, revenue-based investing doesn’t accumulate interest. While the amount you’ll repay for a revenue loan may vary month to month, the percentage you’re paying won’t.
Funding that you receive from venture capitalists or private equity or angel investors, meanwhile, will entitle those investors to partial ownership. Equity financing offers the advantage of a lack of monthly payments, but it also means that you’re committed to forfeiting a portion of your equity, and therefore perhaps forfeiting some of your control over your business.
Are Revenue-Based Business Loans and Financing Right For You?
We love flexible financing as much as you do. But are small business loans based on revenue right for you?
With the pros and cons of getting a revenue loan, one could say it’s a financing option best suited for established companies that have a steady revenue history and aren’t worried about where revenues will be coming from in the future.
That’s not to say that businesses with inconsistent revenues over the course of the year can’t benefit (such as those with seasonally-fluctuating revenues), but revenue-based financing firms will generally want to see evidence of guaranteed revenues going forward. As stated above, businesses that operate on a subscription model (like SAAS companies) are also great candidates for revenue funding.