Guide to Revenue-Based Business Loans

With a revenue-based business loan, a financing company loans your business a lump sum of cash and, in return, you give it a certain percentage of your business’s future monthly revenues. In contrast to traditional business loans, your monthly payments for this kind of funding don’t stay the same, but instead rise and fall as your revenue rises and falls.

Small business loans based on revenue can be a good option for companies that have strong sales but aren’t able to qualify for other small business loan options. You’ll want to keep in mind, however, that this type of financing generally comes with higher costs than traditional business loans.

Read on to learn about how business funding based on revenue works, the pros and cons of business revenue financing, how to find revenue-based business loans, and more.

What Is a Revenue-Based Business Loan?

A revenue-based small business loan is a type of cash flow loan that allows you to borrow against future revenue.

A revenue-based loan provides you with a lump sum amount that’s based on your monthly or annual revenue. Then, instead of asking for fixed monthly payments (as with a typical small business loan), the financing company takes a defined percentage of your total sales within each repayment period, which may be one week or one month.

When reviewing your loan application, a revenue-based lender focuses primarily on your revenue stream and your business plan. Lenders look for the potential to increase your revenue, since the faster your business grows, the sooner the money is paid back and the lower the risk to the lender.

Key Features of Revenue-Based Business Loans

Revenue-based loans allow for greater flexibility than traditional loans. A revenue-based loan is similar to a merchant cash advance in that your repayment amounts fluctuate with your sales volume. With a merchant cash advance, however, repayments come only from debit and credit card sales. A revenue-based loan involves total receipts. This might mean you can afford higher payments and potentially borrow a larger sum.

Payment Flexibility

As mentioned above, small business funding based on revenue doesn’t call for fixed monthly payments. Instead, because repayment amounts are directly tied to your business’s revenue, your payments will be higher during strong sales months and lower during slower periods.

Revenue Thresholds and Repayment Terms

To be eligible for revenue-based financing, you generally have to show that your company’s sales exceed a certain amount per month or year. This is called the revenue threshold, and it will vary by lender. The lender wants to ensure that you’ll have enough coming in every month to make a satisfactory payment.

Typically, there is no set period in which you’re expected to pay back the entire loan, since the amount you’ll replay can vary from month to month based on your sales

Factor Rates and Total Repayment Caps

The cost of the loan comes from a multiplier or factor rate (such as 1.5x) that’s applied to the lump sum that you borrowed. If you take out a revenue-based loan for $10,000 with a 1.5x factor, you’d pay $15,000 in total. That’s likely to be costlier than a traditional loan with a longer term.

The repayment cap is the total amount you will pay back on the loan. It’s calculated by multiplying the principal by the factor rate. If you have strong sales for several months, you will likely reach the repayment cap sooner than if you have poor sales. But whenever you have paid back that amount, you will have fulfilled your obligation. Additionally, there may be a cap on how much money you can repay in a set period, regardless of your sales or the percentage.

How Revenue-Based Business Loans Compare to Traditional Business Loans

Revenue-based business loans vary in significant ways from other types of typical business funding. Some of the most significant include the qualifying criteria for the loan, the way the cost of the loan is determined, and the repayment structure. Let’s take a closer look.

Revenue-Based Financing vs. Term Loans

A common form of small business funding is a small business term loan. With these loans, you apply with a lender, typically providing information to establish your creditworthiness and ability to repay the loan – your annual revenue, your time in business, your personal and business credit scores, and so on. If you get a term loan, you receive a lump sum and then pay it back, with interest, over a specified period of time. In some cases, you may secure your loan with collateral.

In contrast, revenue-based financing typically requires less paperwork and faster approvals. As with a term loan, borrowers receive a lump sum and begin repayments. But instead of an interest rate, borrowers will pay a factor rate – typically this means the total cost of a revenue-based loan will be higher. And rather than a set amount each month, they’ll pay a percentage of their monthly revenue until they reach the total repayment cap. These loans generally don’t involve collateral.

Revenue-Based Financing vs. Merchant Cash Advances

A merchant cash advance (MCA) can appear more similar to a revenue-based business loan. This form of funding is typically faster than a traditional loan, and involves the borrower getting a lump sum upfront. There’s a factor rate, rather than interest, and the cost of the loan is typically higher than a traditional loan.

The major difference between the two types of funding is that a merchant cash advance takes a percentage of your business’s credit and debit card payments, sometimes as often as daily, as opposed to a percentage of gross revenue monthly. It’s also worth noting that MCAs are not considered loans – they are sales – and may be less subject to regulation than revenue-based business loans.

How Does Revenue-Based Financing Work?

With revenue-based business loans, the lender determines how much you can borrow based on your sales, as well as the payment frequency that would work best with your business. You may pay weekly or monthly depending on what the lender thinks you can handle.

Unlike other types of small business loans, revenue-based funding does not involve interest payments. Instead, the repayments are calculated using a particular multiplier that results in repayments that total higher than the initial investment. Typically, these loans come with a repayment amount of 1.1 to 2.5 times the principal loan.

Revenue-based loans are not bound by the same regulations as bank loans. As a result, approvals and funding can be obtained in a relatively short period — generally much shorter than the weeks or months it may take a bank to reach a decision on a traditional loan.

Once you agree to the loan terms, the lender will provide you with a lump sum of capital and soon after will begin deducting a percentage of your revenue. The percentage that is deducted in each payment period is known as the capture rate or the performance rate. It typically falls somewhere between 2.00% and 12.00% of your monthly gross revenue. Using this model, you should ideally never pay more than your business can handle.

Because your payment amount fluctuates with your total sales, payments can, theoretically, go on for a long time, potentially several years.

What Can Revenue-Based Business Loans Be Used for?

Lenders typically expect these loans to be used to develop new products, expand your sales force, or venture into new markets.

However, you can generally use the funds you receive through a revenue-based loan in any way you see fit to support your business. Often borrowers use the funds from a revenue loan in a way that will increase their sales and profit margins or to prepare for a busy season that’s on the horizon. Higher revenues mean you’ll generally pay off the loan faster.

How Can You Pay Off a Revenue-Based Business Loan?

Revenue-based loans are paid off over time, and the amount you pay each month depends on your total sales. Therefore, if you have a stellar few months in sales, it’s feasible you could pay off the loan during that busy season. However, if you have a few slow months, your payments won’t be that much and it will take longer to pay off the loan.

What Happens If Revenue Drops?

Since a revenue-based business loan is repaid through a percentage of your gross revenue, the amount you’ll pay each period (typically per month) will vary. That means that if your revenue drops during one or more months, you’ll pay the same percentage, but that will amount to less cash. If your revenue drops for a long period, it will take you longer to reach your total repayment cap and pay off your loan.

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Pros and Cons of Business Loans Based on Revenue

Like all loan products, revenue-based loans have both pros and cons. When comparing this type of funding to other small business loans, consider the following benefits and drawbacks.

Advantages

A key advantage of revenue-based business loans is that your lender looks at your revenue — and generally not at how old your business is, not at your collateral, and not at your personal or business credit score.

Even if you can’t qualify for a traditional business loan, you may be able to get a revenue-based loan.

For many business owners, it’s the repayment terms that make revenue-based loans particularly appealing. Term loans with fixed payments can work well if your business has consistent, reliable sales. But if your company goes through swings throughout the year, then a fixed monthly payment may not be ideal. With a revenue-based loan, your payments should reflect what you can actually afford to pay.

Unlike merchant cash advances, which only work if your customer base pays with either credit or debit cards, revenue-based loans can work for any business, regardless of how its customers pay. All that matters with revenue-based loans is your total monthly revenue.

Revenue-based financing also tends to carry longer terms than merchant cash advances. This is because the latter often requires a daily payment, while the former can be paid monthly or weekly.

Disadvantages

Revenue-based loans are often pursued by businesses that can’t qualify for traditional loans due to poor credit. From a lender’s perspective, poor credit increases the likelihood that you might not be able to pay off the loan on time. To mitigate this risk, revenue-based financing often comes with high rates and fees. This type of loan can even be more expensive than a merchant cash advance because of the higher borrowing amounts and longer terms.

Since your payment is tied to monthly revenue, your loan term fluctuates. While the faster you grow, the faster you pay off the loan, the opposite is also true — if your growth is slower than expected, the number of months needed to pay off the loan will grow.

Finally, you’re giving up a portion of your revenue each month. That means you’ll have less cash available for other things — like taking advantage of new opportunities that come up, or addressing the unexpected.

Pros of Revenue-Based Loans	Cons of Revenue-Based Loans
Can qualify with poor credit	Higher costs than traditional business loans
Payments are meant to reflect what you can afford to pay	If revenue declines, loan term will increase
Longer term than merchant cash advances	Less monthly cash flow available for other investments or emergencies

Ideal Candidates for Revenue-Based Business Loans

Revenue-based loans can align well with businesses that have fluctuating sales or those that don’t qualify for traditional financing. Also, time frames for these loans may be comparatively short, so companies that are well-positioned to repay their loans faster may also be a good fit.

Types of Businesses That Benefit

Seasonal businesses are compatible with revenue-based financing, as borrowers can make smaller payments during leaner times and larger ones when sales are strong. Examples might include Halloween costume shops and ski equipment dealers.

Businesses with recurring revenue streams, such as software-as-a-service companies and subscription-based enterprises, can also benefit from this form of funding.

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Is a Revenue-Based Loan Right for You?

If you don’t have the credit scores to get a traditional business loan but have solid revenue — and a plan to make it grow even higher — a revenue-based business loan may be a good option for you. These lenders generally care more about where your business is going than where it has been.

And If you use the loan proceeds to develop new products, increase your sales force, or develop new sales initiatives, the result will likely be increased revenue, which will allow you to pay off the loan sooner and could make the high cost of the loan worth it.

This might also be an appealing type of financing if you operate a seasonal business, since your payment will fluctuate along with your revenue and/or you need capital quickly, since it can be faster to get than a traditional loan.

However, you might not be the best candidate for this type of loan if you aren’t certain that your business will be experiencing a solid amount of growth. Also, if your business is struggling, the higher costs that come with this kind of financing could become problematic. In that case, you might want to look into other business loans for bad credit.

Questions to Ask Before Applying

If you’re considering applying for a revenue-based loan, determining the answers to these questions may help you decide.

•   Does your business have a track record of strong, reliable sales and/or plans for increasing them?

•   Would it be difficult for you to obtain other forms of financing that might be less expensive?

•   Are you comfortable with the cost of the loan?

•   Can you afford the performance percentage, even in a slow month?

•   Do you think the benefits you may get from the loan will outweigh the increased cost of these funds?

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6 Steps to Finding and Applying for Revenue-Based Business Loans

Here are the steps that are typically involved in getting revenue-based financing.

1. Figure Out How Much You Want to Borrow

Before you start looking for a lender, you’ll want to take some time to determine how much you want to borrow and exactly how you will use the funds. As part of the application process, you’ll typically need to submit your desired loan amount, along with a plan for how the loan proceeds will be spent and how these investments will help your business.

2. Prepare the Necessary Documents

Applying for a revenue-based loan is similar to applying for any small business loan in that you’ll likely need to gather appropriate paperwork that proves you are who you say you are and that your reported revenue is accurate. You may need to provide:

•   Personal and business income tax returns

•   Balance sheet and income statement

•   Personal and business bank statements

•   A photo of your driver’s license

•   Business licenses and permits

•   Articles of incorporation

•   Details on any other loans (if applicable)

•   Documented plan to increase your existing business revenue

However, there are some types of “no-doc” business loans that don’t require much documentation. These lenders are willing to approve borrowers based on credit history and collateral, but are likely to charge higher interest.

3. Compare Lenders

Banks and other conventional lenders generally don’t offer revenue-based financing. However, you may be able to find this type of loan through investment companies, financing institutions, revenue-based financing firms, and venture capital firms. Loan brokers may also be able to point you toward lenders offering revenue-based loans.

If you end up with multiple options, it can be a good idea to compare not just costs but also any other benefits the financing company offers. Some revenue-based lenders will act as mentors to your business since they have a vested interest in seeing your company succeed, which could be a valuable add-on.

4. Apply

You can typically apply online and, once you submit your application, your chosen lender will review and verify your monthly and annual revenue statements as well as your other submitted documents.

5. Waiting Period

Once you submit your application for revenue-based funding, the response is typically fast. You may hear back within as little as 24 to 72 hours.

6. Review the Loan Agreement Before Signing

If you’re approved for the loan, a representative will reach out and likely present a mix of options with varied repayment terms. You’ll have a chance to go over each option and ask any questions you may have. Be sure you read through the loan agreement you arrive at and thoroughly understand it before you sign off.

Alternatives to Revenue-Based Business Loans

If you’ve been denied for more traditional loan products, but you’re on the fence about going with a revenue-based loan, you might want to consider the following alternatives.

Business Credit Card

If you don’t need that much additional capital, you could consider a business credit card. You might be able to find a business credit card that offers a 0.00% introductory annual percentage rate (APR), which could help you get through any cash flow issues you may be experiencing. The zero-interest intro APR period could last as long as 18 months, which could help you pay business expenses without racking up any interest.

Microloan

What are microloans? Also known as microcredit, this type of financing provides small amounts of funding to help start or grow a business. These loans commonly target specific groups, such as women, minorities, veterans, or others who may face barriers to accessing bank loans and other traditional means of funding.

Peer-to-Peer Loan

Peer-to-peer (P2P) lending is when a borrower receives funding directly from other individuals, cutting out the financial institution as the middleman. Borrowers and investors typically connect on P2P lending websites. Each site sets the rates and the terms and enables the transaction. This may be a viable option if you’ve been repeatedly denied capital using a more traditional route.

Crowdfunding

With business crowdfunding, your company collects small monetary contributions from a large group of people through an online platform. In some cases, you don’t have to pay the money back – instead, you just give each investor a “reward.” However, developing a successful crowdfunding campaign can take a lot of time and effort.

Angel Investor

If you’re willing to part with a small amount of equity, an angel investor may be able to help. Angel investors are usually high-net-worth individuals who are able to provide needed capital to startups and young businesses in exchange for an ownership stake in the company.

SBA Loans and Business Lines of Credit

The Small Business Administration (SBA) partners with private lenders to make a variety of loans at favorable rates available to small business owners who might otherwise have difficulty getting funding. The SBA guarantees a portion of these SBA loans to reduce risk for the lenders, who issue most of the loans. These loans can involve a lot of paperwork, but some of them are specifically meant to be accessible to startups. There are also SBA lines of credit, which allow access to a set maximum of funds that a business draws on when and if it needs it. These lines can be especially helpful in case of emergencies or unexpected costs.

Recommended: Guide to Business Financing

The Takeaway

Revenue-based business loans are a way to get capital by pledging a percentage of future ongoing revenues. Payments reflect whatever percentage you’ve agreed you can afford, but overall, costs may be higher than they would be for traditional business loans. However, other small business financing options may have more stringent financial requirements.

If you’re seeking financing for your business, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your business in minutes.

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FAQ

Can you get a revenue-based loan with bad credit?

Yes. The main deciding factor is your business’s total sales. If you have strong sales, then you may be a good candidate for revenue-based loans.

How do revenue-based business loans even work?

Revenue loans are a form of financing that allows small businesses to get capital upfront and pay it back from future revenues. Payments are based on a weekly or monthly percentage of revenues and continue until the financing is repaid along with the fee. The total cost is usually around 1.1 to 2.5 times the amount borrowed.

Is revenue-based financing good?

Revenue-based financing can be a good option if you’ve been turned down for other types of business loans because of a lack of collateral or a low credit score.

Do you have to have revenue to get a business loan?

Not necessarily. While many business lenders require prospective borrowers to meet minimum revenue thresholds to qualify for a loan, some loans are designed for new businesses that don’t have any sales yet.

Is revenue-based financing a loan?

Yes, revenue-based financing is a type of loan, and it must be paid back through a percentage of your revenues.

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