Revenue Based Financing 101: Everything You Need to Know About This Hybrid Financing

July 5, 2021


It’s no secret that establishing a business can be time-consuming, expensive, and stressful. While some entrepreneurs might be able to afford all the startup costs of a company, many of us need additional support and capital at some point in the process. If you’re feeling overwhelmed about how to finance your startup, here's a list of steps that can help you get revenue-based financing for your small business.

First, What is Revenue-Based Financing? 

Revenue-based financing, also known as royalty-based financing (RBF), is a unique method of raising capital. Essentially, investors receive a percentage of gross revenue in exchange for the money invested. Then, each month, the investor claims their portion of income until the predetermined amount is met. 

RBF is different from the equity financing you’ve probably seen on Shark Tank as the investor doesn’t have direct ownership of the business. It’s not selling shares but rather selling a percentage of revenue each month. This new model of financing is a hybrid between debt financing and equity financing. 

How Does Revenue-Based Financing Work? 

Revenue-Based Financing (RBF) is similar to equity financing since investors or a financing firm provide capital. The company needs to pay back a set amount of money through monthly payments, but they don’t pay interest on an outstanding balance like with a bank or creditor. However, the company does have to pay back a multiple of the amount provided. 

For example, Coco Finder, a small SaaS company based in Singapore, sought revenue-based funding of $1 million in capital. “The investors specializing in revenue-based financing provided the required $1 million in exchange for a portion of our revenues,” CEO Harriet Chan explains. As a result, the company made monthly installment payments equal to 2% of its overall revenue. Additionally, they needed to pay a 1.5 multiple of the original amount to compensate the investors for the risk. 

The process works the same, no matter if in Singapore or the U.S., with monthly payments frequently ranging from 1 to 3% of revenue and multiples of 1.5 times to 3 times the lent amount. So while Revenue-Based Financing comes with many benefits, it is still important to analyze its cost to your business.

Think you might want to move forward? You're in luck! That's what the next section discusses. ;-)

How to Get Revenue-Based Financing to Start a Business: 6 Major Steps 

Know The Reason And Amount for the Revenue-Based Financing

Revenue-based financing can be best for financing large amounts of capital. For more traditional, revenue-based financing firms, the amounts start at a minimum of $100,000 and go up to $2 million or more. More recent, Revenue-Based Financing firms are more flexible and offer lower amounts of capital. As stated earlier, interest rates expressed in revenue caps can range between 1.35 to 3 times the initial amount of capital. Figure out how much money you need for growth and the multiple you can afford. 

RBF is great for fast-growing Software As a Service (SaaS) companies or other technology startups with considerable revenue. However, RBF also makes sense for subscription-based companies, big eCommerce startups, and even game developers. 

Decide the Type Of Structure You Need  

There are a few different structures when it comes to revenue-based funding. Overall, the structure is based on a fixed percentage of revenue ranging from one to three percent or as high as eight percent. The term is usually three to five years but can take as long as needed to pay back the capital. 

  1. Predetermined multiple of the initial loan amount.  Also known as a “repayment cap,” the multiple can range from 1.35 to 3 times the capital. 
  2. Predetermined rate of return.  A pre-determined internal rate of return (IRR) is the annual growth rate the investment is expected to return. For instance, the fixed IRR could be 25-30 percent. 
  3. Predetermined date to stop payments. In some cases, the investor of a financial firm might decide on a fixed date to stop monthly payments. 

Compare Financing Firms 

Revenue-based financing can come from investors, venture capitalist firms, or other financing firms. Some of the top ones are: 

  • Pipe: specializes in SaaS financing. 
  • Lighter Capital: provides debt solutions for Saas companies. 
  • Wayflyer: specializes in financing for eCommerce brands. 

Find the complete list on FundScape when you sort by Revenue Based Financing (RBF). 

Check Your Qualifications 

The requirements for RBF are different from a traditional loan. While investors don’t look at credit score or the amount of time in business, there are a few other specific requirements. Companies seeking this type of financing will generally need: 

  • A minimum of $200,000 in annual revenue with consistent income each month
  • High growth margins of 50% or more
  • A path to profitability if not profitable already 
  • Little to no outstanding debt 

“These are steep requirements,” says Carter Seuthe, CEO of Credit Summit. “It’s very popular in the SaaS world because those companies usually show exponential growth, but in other sectors, it makes no sense,” he continues. As we can see, RBF is great for startups and newer businesses that can’t qualify for a traditional business loan. However, for companies with smaller annual revenues, it might not be a viable option. 

Gather the Necessary Documents 

Unlike applying for a traditional loan, you don’t need many documents to apply for revenue-based financing. But, at a minimum, have proof of at least $200,000 in revenue and a business plan showing a path to profitability. These terms are becoming more flexible as some firms are finding innovative ways to offer revenue based financing.

Apply For RBF 

Once you’re ready to apply for RBF, submit an online form to your top choice of financing firm. The process can take about 30 days to complete, which might be longer than getting a business loan or line of credit. 

Key Takeaways  

For startups that need an alternative form of financing than traditional banks and don’t want to give up ownership, revenue-based financing is an excellent choice. While a company does need to fit specific requirements in terms of revenue and growth, the financing could be cheaper if they qualify. 

Instead of interest rates or selling shares, the company agrees to pay back a multiple of the total amount financed. The payments are a set percentage of the revenue each month, increasing or decreasing with earnings. RBF is best for SaaS, technology, or subscription-based businesses. New RBF firms are emerging, and some have innovative options to providing smaller amounts of capital.

Need Help With Revenue-Based Financing?

If you’re still feeling stressed about where to start with revenue-based funding, FundBoard can help. Our FundScape database has a curated list of more than 125 fundraising options.

In addition, you can filter by financing type, such as RBF, to find the right investor or firm for your business. If you feel RBF isn’t right for you, you can also explore traditional business loans, equity-based financing, and other funding options.

HomeOur Take
AppCommunityPrivacy PolicyTerms of Service
Copyright © 2020 FundBoard - All Rights Reserved.