Revenue-Based Financing
How it works —
A financier provides you with a fixed financing amount and you pay a fixed percentage of ongoing revenues to pay it back. The payments increase and decrease based on business revenue. These payments continue until the initial amount, plus a multiple (also known as a cap), is repaid.
Example —
You receive $100k from a financier and agree to pay 5% of monthly revenues until you pay back a total of $150K.
You Might Be A Fit If —
- You have predictable monthly revenue.
- You have consistently high gross margins.
Why You Would Use This —
Unlike most loans, there are no fixed payments. Payments scale up and down based on the growth of the business.
Payback periods are driven by revenue growth of the business and are typically longer than comparable financial products.
Things to Watch Out For —
If your revenue grows very quickly, so do your payments. This will pay the loan off faster and with a fixed repayment cap, this will mean a higher annualized cost of capital.
If you are comfortable with the total repayment amount, this will not change based on your growth.
The company immediately starts paying back the loan as the business receives revenue.
Make sure you are willing to give up the agreed-upon percentage of revenue and your gross margins are high enough to support the financing costs.