Revenue-Based Financing: What You Need to Know

The status quo of business financing is failing millions of women business owners, who are the engine of our economy and deserve better.

Did you know that women business owners are paying higher interest rates, are often required to provide more up-front collateral versus men, and are more likely to use credit cards to fund their businesses?

The stats for equity investment are no better. While total venture capital funding increased in 2020, women-led companies received just 2.3% of that funding.

Revenue-based financing (“RBF”) is an alternative type of financing that has some features of debt and some features of equity. Essentially, you receive capital in exchange for a pledge to pay back that capital based on a percentage of your monthly revenue. RBF has been around for many years, but its popularity (in terms of number of investors offering RBF) has increased in recent years.

Here’s an overview of the process for accessing Revenue-Based Financing:

1. Step 1: Provide your company information (overview, revenues, years in business, etc.) via investor's application form

2. Step 2: Investor provides funding to your company in exchange for an agreed-upon percentage of future monthly revenue

3. Monthly payments continue until a certain date or a set dollar amount has been paid back (typically 1.3 to 3 times the initial funding amount)

Benefits of Revenue-Based Financing

1. Non-dilutive - you don’t have to give up shares of your company

2. Repayments based on revenue - unlike traditional loans, where you owe a fixed payment amount monthly, RBF is paid back based on a percentage of your revenues. This helps for businesses that have dips in their revenue due to seasonality or other factors - if you have a slower month, you'll owe the agreed upon percentage of the lower revenue amount your business generated.

3. No personal credit score requirement - with bank loans/lines of credit and business credit cards, your personal credit score is a factor on your funding application, while RBF is structured based on your business

4. Can be accessible if not yet profitable - some RBF providers will fund even if your company is not profitable yet, but you should have a path to profitability

5. Generally no personal guarantee / collateral required - unlike traditional bank loans, which usually require a personal guarantee (legal agreement where you agree to repay the loan and/or collateral (pledge of your personal assets or income),

Cons of Revenue-Based Financing

1. Predictable revenue preferred - RBF providers generally prefer businesses with stable, recurring monthly/annual revenue streams

2. High cost of capital - rates vary but are typically 2–10% of revenue, plus a fee (~5-15% of total funding)

3. Timing - can take several weeks to 30 days or more to receive funding

4. Limited business types depending on the investor - many focus on tech, software, e-commerce, service- and subscription-based businesses, since many businesses in these sectors have recurring revenue models, which gives the investor more confidence they will be paid back

5. Limited funding amounts - generally RBF investors will not fund more than 3-4 months of your monthly revenue

Top Tips

If you’re considering revenue-based financing for your business, here are a few questions you can ask your potential RBF investor:

• Talk to other companies the investor has funded - how has their experience been?

• Beyond capital, does the investor provide any additional benefits, such as coaching / accelerator programs?

• How many companies have they funded? How many investments do they currently have?

• Do they provide additional capital as your company grows? Do they help connect the companies they invest in to other sources of funding?

Have you ever considered revenue-based financing for your business?