Revenue‑Based Financing (RBF) is a way to get funding quickly where lenders provide an upfront amount of cash to a business in exchange for a set percentage of the company’s future sales. This financing strategy can have variable or fixed terms meaning the payback period is defined on a daily, weekly, or monthly basis. And it can be a fixed amount (fixed) that is agreed on before the receivables are purchased or it can change depending on the amount of sales in that payment period (variable).
The most common types of revenue-based financing are:
- Merchant cash advances: A portion of debit and credit card sales is sent to the financing provider.
- Invoice factoring (receivables financing): Where a company sells its invoices at a discount to a “factoring company,” which then collects the payments.
- Subscription financing: The financing provider receives a portion of the monthly recurring revenue (MRR) that the borrower collects from subscribers.
This is one of the most common types of financing for small businesses that don’t qualify for a small business loan or cannot wait for the underwriting process with a traditional bank. The business owner instead uses existing relationships with vendors, suppliers, and investors who will lend the money quickly as they know the company’s financial history and sales numbers.
Instead of using interest rates like a standard business loan, revenue-based financing uses factor rates which is a calculation for the total amount of money that will be paid back over the entire course of the loan.
RBF is a type of debt financing based on the Generally Accepted Accounting Principles (GAAP), but double check with your accountant because it may be a type of equity investment or treated like other assets on your balance sheet. This includes rare cases like a financing provider not getting paid if you go bankrupt or if you have to pay a percentage of revenue indefinitely.
The financing provider in an RBF relationship enjoys stronger and faster returns with the variable repayment model compared to a traditional business loan or fixed model, and it builds a stronger relationship with their customer.
If the customer needs the financing to stock more inventory when seasonal demand is high or when raw materials are on sale in bulk for the upcoming busy season, the supplier or company that purchases from them cements their relationship by being there when the customer needs them.
If you’re thinking about financing for your small business, here’s how revenue-based financing works, when to use it, and how it stacks up against other small business financing so you know all of your available options.
How Revenue‑Based Financing Works
Revenue‑based financing works by giving you a lump sum of cash in exchange for a percentage of future revenue with this 3-step process:
- Negotiate contract terms with RBF providers.
- Receive funds and begin paying a percentage of new revenue.
- Pay off the financing and confirm any UCC filings are terminated.
Negotiate RBF contract terms
Revenue‑based financing is structured differently than small‑business loans and has three unique items you can negotiate:
- Factor rate and the amount you’ll pay on top of the advance called the “cap fee”
- Additional/admin fees
- Revenue share percentage and payment frequency
The factor rate can be negotiated if you know you’ll be able to pay the debt back more quickly. The RBF provider may agree to it if it will have its money back with the additional payments, which they can then use to invest in more ventures or spend on their own business. By knowing how to calculate the factor rate and cap fee, you can negotiate it down and present a number that works better for you while keeping their returns high.
The factor rate determines the cap fee with this formula:
- Cap fee = Advance amount × Cap multiple − Advance amount
- If you take a $100,000 advance with a 1.25x factor rate, the cap fee is $25,000. You add the cap fee to the advance amount and then add other fees to get your total payback amount.
The next things to negotiate are the extra fees like origination, legal, processing, ACH, and wires. Some can be legitimate, and others might simply be fluff padding depending on the deal. Have a lawyer review your agreement before signing and push back on anything that isn’t necessary.
The last item to negotiate in a revenue-based financing deal is the payment frequency. Except for merchant cash advances, most RBF payments are usually paid monthly. Watch out for RBF provider asking for more frequent payments for two reasons:
- The additional admin work of tracking all sales and paying each week or day takes up time you could be spending on your business—unless the company offers automatic remittances.
- Paying more often makes financing more expensive. The annual percentage rate (APR) is the true annual cost of financing your business, so you have to convert different types of financing into an APR. Here’s how the numbers line up.
| RBF (Weekly) | RBF (Monthly) | Small Business Loan | |
| Factor rate | 1.25 | 1.25 | N/A |
| Interest rate | N/A | N/A | 25% |
| Additional fees | $0 | $0 | $0 |
| Remittance period (Estimated for RBF) | 104 weeks | 24 months | 24 months |
| Payment frequency | Weekly | Monthly | Monthly |
| APR | 31.27% | 30.07% | 28.07% |
Pro-tip: Define “revenue” in your contract so that it excludes sales tax, gift‑card float (if you sell gift cards), refunds, chargebacks, and shipping credits or other sales adjustments. This prevents you from paying on items that don’t ultimately count as sales for your business.
Receive funds and begin repayment
When you finalize the agreement, your RBF provider will deposit the funds into your bank account. Then it’s up to you to monitor monthly sales and ensure they get paid the correct amount each month.
Detailed, real-time bookkeeping is critical for revenue-based financing because the RBF provider won’t sit around waiting for payment. Missed remittance deadlines could force you into default or potentially bankruptcy if they call the full remittance amount due based on your contract and you don’t have the cash ready.
Finalize payoff and confirm any UCC filings are terminated
The last step is to finalize your revenue-based financing payoff and make sure it’s recorded in public records. There are three things to do here, and they should be done in this order.
- Get an official $0 balance letter from your RBF provider and cancel automated debits.
- Check your Secretary of State’s website for UCC filings.
- If needed, correct errors in the public record through your Secretary of State’s office.
Step 1 is having the RBF provider send you an official notice that the total receivables amount has been remitted and you have $0 remittances left to make when you make your final remittance. Use this to cancel any automatic debits coming from your accounts and reject any authorization for the RBF provider to debit your account.
Step 2 is searching public records to make sure any UCC liens filed by the RBF provider are terminated. Your Secretary of State’s website like this one from Colorado will have an online UCC search. Your RBF provider likely filed a UCC-1 in public records when you started giving them a claim to your assets. If so, they should also file a UCC-3 termination to release this claim.
If needed, step 3 is fixing any errors. If you don’t see a UCC-1 filing, check with the RBF provider to see whether they filed one. If so, get a copy for your records. If they didn’t submit a UCC-3 filing, send them a letter requesting they file one. They may have to file a UCC-3 termination within 20 days of getting your letter, or you can terminate it yourself through your Secretary of State.
If they delay filing a UCC-3 termination, file a UCC-5 form to document your dispute to their claim in public records. This won’t release their original claim, but it puts your side of the story on the record, and then you can work through your Secretary of State and state courts if necessary to get the claim released.
When to Use Revenue Based Financing
The times to use revenue-based financing are when you can’t qualify for a small‑business loan, you can’t wait for approval and funding on a small business loan, or you’re uncertain about the timing of future sales. This is why RBF works well for new or existing companies that have plenty of sales but don’t have a good business credit score or collateral to secure a traditional business loan.
The RBF approval process is generally faster than traditional business loans. This makes it a great option when you need cash faster than a traditional loan underwriting and funding timeline allows.
Revenue-based financing also works when you’re uncertain about the exact timing of future revenues. This could be in the wake of a natural disaster where you don’t know when things will recover, or when you don’t know when you’ll get a big regulatory approval or permit. You’d have to start making payments immediately with standard business loans, but you only make payments to RBF providers when you have revenue.
RBF Financing Options and Alternatives
If RBF doesn’t sound like a match, there are other types of small business financing available.
| MCA | Invoice Factoring | Small Business Loan | Line of Credit | Business Credit Card | |
| Speed | Yes | Yes | Depends on lender | Yes | Yes |
| Collateral | No | No | Yes | Sometimes | No |
| Main benefit vs RBF | Convenience | No payback | Credit score and cost | Credit score and speed | Credit score and speed |
| RBF main benefit vs alternative | Payment frequency and cost | Availability and speed | Speed and payment flexibility | Speed and capital amount | Speed and capital amount |
Merchant Cash Advances (MCAs)
Merchant cash advances are a subset of revenue-based financing but focus mostly on more frequent payments and limit the payback to sales from credit and debit cards. This makes them more convenient in that the card processors handle most of the tracking and payments, but it makes them significantly more expensive since you pay more often. They also take longer to pay back because you’re only paying with a percentage of your revenue.
Invoice Factoring
Invoice factoring is selling accounts receivable at a discount to a third party called the “factoring company” that collects the invoice from your customer. It’s a type of RBF in that you’re selling future cash flow for a lump sum now. The benefit of invoice factoring is that it’s a true sale where you have nothing to pay back.
If you have multiple small accounts and a few are problematic so you don’t mind losing them, using invoice factoring can be a way to get the payment quickly so you can focus more time on your company. It is also a way to not have to chase down multiple small accounts when you decide to go for larger bulk purchases and corporate accounts.
This revenue-based financing strategy takes longer than other types of RBF since the factoring company will need to check your customer’s creditworthiness to pay their invoice. Another limitation is that you must have an invoice to sell vs. an MCA where you use future sales. That means you cannot use this strategy if you don’t have accounts receivable.
Subscription Financing
The other option is to sell a portion of your monthly recurring revenue (MRR). If you know the average seasonal, monthly, and annual churn (subscribers that leave) and growth rates, you can easily predict how quickly you’ll be able to pay back the total amount owed.
If your sales team closes a few large accounts, MRR is going to increase and your debt will be paid more quickly to free up future cash flow. The same will happen if you find ways to reduce churn. Subscription financing can only be done for subscription-based companies like SaaS, subscription services including boxes or food delivery, and memberships including wholesale warehouses or country clubs.
Small Business Loans
Small business loans are a cheaper alternative to revenue-based financing for most companies, but the process is slower and lenders often require collateral, personal guarantees, and other qualifications for approval.
Added fees on traditional loans can increase their APR though, so don’t compare versus the APR of revenue-based financing before choosing. Another benefit of small business loans is that, depending on your lender, they can build your business credit score, while revenue based financing won’t.
Line of Credit
When you have an approved line of credit (LOC), it will be faster to get the cash than with RBF. If you don’t already have a line of credit open, revenue based financing will have a faster approval process.
Interest rates on lines of credit will make them cheaper than RBF as long as you pay off the LOC balance instead of just paying the interest.
A line of credit can be better when you need to conserve or reinvest as much cash flow as possible, since most LOC set your minimum payment each month to the interest due. But be careful, paying interest on an LOC can become more expensive than the total amount owed on an RBF deal if you miss payments.
Business Credit Cards
Business credit cards are similar to lines of credit when compared to revenue-based financing, as they give you access to purchasing power faster when you have them already. Where RBF outshines cards is when you need higher dollar amounts than your card’s set credit limit.
Revenue‑based financing gives you upfront cash in exchange for a share of future revenue until you pay back the amount borrowed with the cap and other fees. It can be more expensive than most other funding types, but the flexible payments based on a percentage of sales instead of a fixed amount, as well as the speed of approval, make it worthwhile when you can’t qualify for or don’t have time to wait for approval on a small business loan.
SmallBusinessLoans does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only. You should consult your own tax, legal and accounting advisors.
