Revenue-based financing

What it means

Revenue-based financing is funding that a company repays as a percentage of its future monthly revenue until an agreed multiple of the amount advanced is reached. In good months it repays more, in weak months less, so repayments flex with the business's performance.

It suits businesses with recurring income, such as SaaS companies with predictable MRR or online stores with steady sales. The provider looks mainly at revenue history rather than collateral and often uses direct access to data from payment and accounting systems.

Unlike venture capital, founders give up no equity. Unlike a bank loan, there is no fixed instalment or interest rate; the cost is the difference between the amount repaid and the amount received, which translates into a high annual cost if repayment is quick.

How it works in practice

It is typically used to fund marketing, inventory or growth, where the investment quickly turns into revenue. A company might, for example, raise money for an advertising campaign and repay it from the sales the campaign generates, without diluting ownership.

Before signing, calculate the effective annual cost under different growth scenarios. If the company grows fast, it repays the agreed multiple within months and the annual cost is high. Comparison with venture debt or a bank loan shows whether it is a sensible choice.

In the accounts it is a liability, and the difference between the amount repaid and the amount received is spread over time as a finance cost. Agreements often include covenants and revenue reporting duties that must be met on an ongoing basis.

What to watch out for

The percentage is paid on revenue, not profit. With thin margins, repayments can swallow most of the profit and strain cash flow. The model therefore suits companies with high gross margins and controlled costs.

A change in business model, such as moving from monthly to annual billing, can change the repayment amounts and the relationship with the provider. Check what the agreement says about such changes, about a sale of the company and about early repayment.