What is revenue-based financing (RBF)?

How lenders use it

RBF funders underwrite the revenue, not the assets. They connect to the business's bank account, payment processor, accounting software or sales platforms and read the data directly. They look for steady or growing revenue, healthy gross margin and low refunds or churn.

The advance is often sized as a multiple of recent monthly revenue. The funder sets a repayment cap, such as 1.3 times the advance. It also sets the share of revenue it will take each month, such as 5%. Both numbers go in the term sheet.

RBF suits businesses with recurring or predictable sales, such as subscription software or online shops. It fits less well with a business that has lumpy sales or thin margins, because the share taken each month can strain cash.

The credit team watches how the business uses the money. If the advance pays for marketing or stock, the funder checks that revenue grows as planned. The funder usually asks for monthly reporting or ongoing data access during the term.

Worked example

Example only. A funder advances $100,000 with a repayment cap of 1.3 times. The business owes $130,000 in total. The funder takes 5% of monthly revenue.

If revenue stays at $80,000 a month, the payment is $4,000. It takes about 32 months to repay. If revenue doubles to $160,000, the payment is $8,000 and repayment takes about 16 months. The funder is repaid sooner when the business does well.

Common confusions

RBF is not a merchant cash advance. An MCA is usually short and takes a daily debit or a split of card sales. RBF usually runs longer and takes a monthly share of total revenue.

RBF is not equity. The funder does not own part of the company. Some deals add warrants, so read the terms.

RBF is not a term loan. A loan has a set interest rate and payment schedule. RBF has a cap and a revenue share, so the end date is not fixed.

Questions lenders ask

How does RBF underwriting work?

The funder reads revenue data from bank, payment, accounting and sales systems. It checks growth, margin, refunds and concentration in a few customers. It then sets the advance, the repayment cap and the revenue share. A person approves the terms.

What does a repayment cap mean?

It is the most the business will pay back in total. If the advance is $100,000 and the cap is 1.3 times, the business pays $130,000 at most. The cap is fixed even if repayment takes longer than expected.

What is the difference between RBF and a loan?

A loan has a fixed interest rate, term and schedule. RBF has a fixed total cost and a variable schedule that follows revenue. A lender should check cash flow in a weak month to see whether the share is still affordable.

Which businesses are a poor fit for RBF?

Businesses with thin margins, lumpy revenue or high refunds. The monthly share can take too much of the cash they keep. Funders usually avoid them or lower the advance.

Merchant cash advance: Cash today for a share of future sales
Working capital loan: Short-term funding for day-to-day costs
Cash flow lending: Lending against earnings, not against assets
Alternative lender: A lender that is not a high street bank

This page is general information for lenders. It is not legal, tax or credit advice.