Revenue Based Financing Could Free You From Fixed Payments

Revenue Based Financing Could Free You From Fixed Payments
Rebecca Hosley
on March 18, 2020
Read in 3 min

Imagine this scenario:

You own a small business, but it’s growing fast.

Every month you’re bringing in new customers.

You were even profiled in your local newspaper as a company to watch.

However, you’ve got one major problem – not enough cash to keep up with the needs of your rapidly-expanding empire.

There are several options you could consider, such as a traditional term loan from a bank, or a business line of credit.

However, for a business experiencing rapid growth like yours, there is another choice you should consider – revenue-based financing.

What is Revenue-Based Financing?

Also known as royalty-based financing, revenue-based financing (RBF) is a type of business loan.

The typical RBF loan ranges between $50,000 and $1 million.

Lenders charge roughly one to three times the amount borrowed, which is repaid in monthly installments.

However, unlike a traditional bank loan where you need to make a set payment each month, loan repayments are based on a percentage of your monthly revenue.

This means the percentage you pay each month varies but can be as high as eight percent.

One reason business owners like these types of loans are because during slow months they’ll pay less – only making heftier repayments on the months where they rake in the most cash.

Instead of a fixed number of months to repay the loan, it is paid off based on the success of your company.

Meaning, the faster your business grows its revenue, the faster the loan gets paid off.

RBF lenders receive better returns the faster the borrower is able to repay the loan.

This is one reason RBF lenders are more interested in a business’s potential for rapid growth rather than current revenues when they evaluate prospective borrowers.

Other factors they consider include demonstrating how you’ll use the money, and how you plan to tap into the lender as a mentor.

What Types of Businesses Qualify for Royalty-Based Financing?

Royalty-based financing is typically suited for businesses that are high-growth, and that operate at high margins.

Software as a service (SaaS) businesses are one common type of company that often qualify for this type of loan due to their ability to scale quickly.

Lenders will expect you to demonstrate that you plan to use the borrowed funds as growth capital to scale your business through initiatives such as:

  • Sales and marketing.
  • Product development.
  • Hiring new employees.

On the other hand, brick and mortar businesses often don’t qualify for RBF financing.

That’s because they don’t generate the necessary monthly profit margins.

If that describes your business, then you may still have plenty of options, including merchant loans, credit card processing loans, and merchant cash advances that can help you raise needed capital.

RBF – The Benefits

As we mentioned, this type of financing is designed for businesses that are poised for rapid growth.

Companies like this might also attract the attention of venture capitalists.

But not every business owner has grand designs to become the “next big thing” and may not have growth plans that are aggressive enough to catch the eye of a venture capitalist.

However, they are businesses that are ready to scale and appear sustainable – which is what royalty financing lenders are looking for.

In addition, many business owners don’t want the strings that come along with accepting venture capital, such as ceding a stake and a say in the business to the investor.

By turning to revenue-based financing instead of venture capital, business owners can maintain full ownership and control of their company.

However, some lenders are more actively involved than a typical lender would be.

This means they may serve as an unofficial mentor for your business.

This could include anything from:

  • Sitting in on board meetings.
  • Providing feedback on business plans.
  • Offering advice on how to scale.

Revenue-based financing is also a good fit for newer businesses.

Traditional lenders are sometimes skittish to lend money to companies that don’t have a lengthy track record.

But since RBF lenders care more about the projected growth and revenue of a business than its history, they are more comfortable making loans to newer companies.

The Drawbacks of RBF for Small Businesses

Unlike, say, invoice financing, there is a lengthier approval process for royalty-based financing.

That’s because lenders need to not only look at your business’s history and bank accounts but also your business plan and projections for growth.

Because of that, small business owners can expect to wait between two to four weeks for a decision on their application for a revenue-based financing loan.

If approved, you should receive your funding within about 30 days from your initial application.

There are also specific revenue requirements you will need to meet.

Most RBF lenders are looking to fund businesses with monthly revenues of at least $15,000 to $30,000.

In many cases, lenders will also be looking for some degree of consistency in your monthly revenue.

For this reason, many lenders prefer to work with subscription-based businesses that charge users a set monthly fee.

How Can I Get a Revenue Loan?

Unlike a traditional business loan, you can’t simply walk into the branch of your local bank and apply for a revenue-based loan.

This is a bit of a specialty product, and many of the lenders who offer this type of financing are specialists who only offer RBF loans.

Some revenue-based lenders include:

For a more in-depth look at how the loan process works, be sure to read our review of Lighter Capital.

LendGenius has a simple online form if you want to get started and potentially connect with a lender.

It doesn’t get much easier than that!

See Business Lenders

Getting a Small Business Loan Online

Rebecca Hosley Finance Journalist

Rebecca Hosley is a content writer based in Chicago.

She frequently writes about small business, insurance and finance.

In her free time, she enjoys trivia, craft beer and disc golf.

Important Disclosures. Please Read Carefully.

Persons facing serious financial difficulties should consider other alternatives or should seek out professional financial advice. This website is not an offer to lend. Lendgenius.com is not a lender or lending partner and does not make loan or credit decisions. Lendgenius.com connects interested persons with a lender or lending partner from its network of approved lenders and lending partners. Lendgenius.com does not control and is not responsible for the actions or inactions of any lender or lending partner, is not an agent, representative or broker of any lender or lending partner, and does not endorse any lender or lending partner. Lendgenius.com receives compensation from its lenders and lending partners, often based on a ping-tree model similar to Google AdWords where the highest available bidder is connected to the consumer. Regardless, Lendgenius.com’s service is always free to you. This service is not available in all states. If you request to connect with a lender or lending partner in a particular state where such loans are prohibited, or in a location where Lendgenius.com does not have an available lender or lending partner, you will not be connected to a lender or lending partner. You are urged to read and understand the terms of any loan offered by any lender or lending partner, and to reject any particular loan offer that you cannot afford to repay or that includes terms that are not acceptable to you. By submitting your information via this website, you are authorizing Lendgenius.com and/or lenders and lending partners in its network or other intermediaries to do a credit check, which may include verifying your social security number, driver license number or other identification, and a review of your creditworthiness. Credit checks are usually performed by one of the major credit bureaus such as Experian, Equifax and Trans Union, but also may include alternative credit bureaus such as Teletrack, DP Bureau or others. You also authorize Lendgenius.com to share your information and credit history with its network of approved lenders and lending partners. For qualified consumers, our lenders offer loans with an Annual Percentage Rate (APR) of 35.99% and below. For qualified consumers, the maximum APR (including the interest rates plus fees and other costs) is 35.99%. All loans are subject to the lender’s approval based on its own unique underwriting criteria. Example: Loan Amount: $4,300.00, Annual Percentage Rate: 35.99%. Number of Monthly Payments: 30. Monthly Payment Amount: $219.36. Total Amount Payable: $6,581.78 Loans include a minimum repayment plan of 12 months and a maximum repayment plan of 30 months. In some cases, you may be given the option of obtaining a loan from a tribal lender. Tribal lenders are subject to tribal and certain federal laws while being immune from state law including usury caps. If you are connected to a tribal lender, please understand that the tribal lender’s rates and fees may be higher than state-licensed lenders. Additionally, tribal lenders may require you to agree to resolve any disputes in a tribal jurisdiction. You are urged to read and understand the terms of any loan offered by any lender, whether tribal or state-licensed, and to reject any particular loan offer that you cannot afford to repay or that includes terms that are not acceptable to you.

Lender’s or Lending Partner’s Disclosure of Terms.

The lenders and lending partners you are connected to will provide documents that contain all fees and rate information pertaining to the loan being offered, including any potential fees for late-payments and the rules under which you may be allowed (if permitted by applicable law) to refinance, renew or rollover your loan. Loan fees and interest rates are determined solely by the lender or lending partner based on the lender’s or lending partner’s internal policies, underwriting criteria and applicable law. Lendgenius.com has no knowledge of or control over the loan terms offered by a lender and lending partner. You are urged to read and understand the terms of any loan offered by any lenders and lending partners and to reject any particular loan offer that you cannot afford to repay or that includes terms that are not acceptable to you.

Late Payments Hurt Your Credit Score

Please be aware that missing a payment or making a late payment can negatively impact your credit score. To protect yourself and your credit history, make sure you only accept loan terms that you can afford to repay. If you cannot make a payment on time, you should contact your lenders and lending partners immediately and discuss how to handle late payments.