Revenue-Based Financing

Instead of fixed loan repayments or giving up shares, a business receives funding upfront and repays it as a share of its sales. When revenue is high, repayments are larger; when revenue falls, repayments shrink.

For example, a software company receives 500,000 and agrees to pay 6% of its monthly revenue until it has repaid a total of 700,000, which is 1.4 times the amount received. If sales grow quickly, it repays sooner; if sales slow, repayment takes longer.

Revenue-based financing is popular with businesses that have steady, recurring revenue but may not qualify for bank loans or want to avoid diluting their ownership by selling equity. It is often quicker to arrange than venture capital.

The total cost can be high, especially if the business repays quickly, since the effective annual interest rate rises when the fixed total is repaid over a shorter time. It is less suitable for businesses with thin margins, since repayments come out of revenue before costs.