Guide to Revenue-Based Business Loans

By Lauren Ward · May 30, 2024 · 11 minute read

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Guide to Revenue-Based Business Loans

With a revenue-based business loan, a financing company gives your business a lump sum of cash and, in return, you give them a certain percentage of your business’s future monthly revenues. Unlike traditional business loans, your monthly payments don’t stay the same, but instead rise and fall as your revenue rises and falls.

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, this type of financing generally comes with higher costs than traditional business loans.

Read on to learn the pros and cons of business revenue financing, how revenue-based financing works, 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.

With this type of financing, you receive a lump sum amount that is based on your monthly and annual revenue. Then, instead of making fixed monthly payments to pay the money back (as you would with a typical small business loan), the financing company takes a defined percentage of your total sales within each repayment period, which is typically 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 lower the risk to the lender.

A revenue-based loan is similar to a merchant cash advance. Like a merchant cash advance, your payments fluctuate with sales volume. With a merchant advance, however, payments come from debit and credit card sales. With a revenue-based loan, payments come from your total sales.

Your borrowing amount is also based on total monthly receipts, which might allow you to access larger funding amounts than you could with a merchant cash advance (where the advance amount is only based on debit and credit card sales).

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 multiple that results in returns that are higher than the initial investment. Typically, these loans come with a repayment amount of 1.5 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 months it may take a bank to reach a decision.

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. It typically falls somewhere between 2% and 8% of your monthly 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. 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 is on the horizon. Higher revenues mean you will pay off the loan faster and, ultimately, pay less in interest.

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 a busy season. However, if you have a slow month, your payment won’t be that much and it will take longer to pay off the loan.

Recommended: No Money Down Business Loans

Pros and Cons of Business Loans Based on Revenue

Like all loan products, revenue-based loans have their share of pros and cons. When comparing it 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 — not how old your business is, not your collateral, and not 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 business goes through swings throughout the year, then a fixed monthly payment may not be ideal. With revenue-based loans, 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 choose to 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.

Recommended: Small Business Tax Deductions

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 won’t 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. This results in paying more interest over the term of the loan because the interest accumulates over a longer period of time. Sometimes lower growth is outside of your control, but you need to be aware of how this affects the cost of your debt.

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 reflect what you can afford to pay If revenue declines, loan term will increase, along with borrowing costs
Longer term than merchant cash advances Less monthly cash flow available for other investments or emergencies

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 you came from.

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 type of loan could become problematic. In that case, you might want to look into other business loans for bad credit.

Recommended: Credit Score Needed for Business Loans

5 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 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. 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 have:

•  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

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 towards 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 other submitted documents.

5. Waiting Period

If you are approved for the loan, a representative will reach out and likely present a mix of offers with varied repayment terms. You’ll have a chance to go over each offer and ask any questions you may have. In some cases, you can get approved and have the cash in hand within several days to a few weeks.

Alternatives to Revenue-Based Business Loans

If you’ve been denied more traditional loan products, and are on the fence about going with a revenue-based loan, you may 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% introductory annual percentage rate (APR), which could help you get through any cash flow issues you may be experiencing. The 0% intro APR period could last as long as 21 months, which could help you pay off any business expenses without racking up any interest.

Microloan

Microloans are small amounts of funding intended 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 (also known as crowdlending) is when a borrower receives funding directly from other individuals, cutting out the financial institution as the middleman. Borrowers and investors 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 the more traditional route.

Crowdfunding

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

Angel Investor

If you’re willing to part with a little bit 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 start-ups and young businesses in exchange for an ownership stake in the company.

The Takeaway

Revenue-based financing is a way to get capital by pledging a percentage of future ongoing revenues. However, there are other small business financing options to consider, as well.

If you’re seeking financing for your business, SoFi can help. On SoFi’s marketplace, you can shop top providers today to access the capital you need. Find a personalized business financing option today in minutes.


With SoFi’s marketplace, it’s fast and easy to search for your small business financing options.

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-based financing is a form of financing that allows small businesses to get capital up front 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, which is usually around 1.5 to 2.5 times the principal loan.

Is revenue-based financing good?

It can be a good option if you have been turned down for other types of business loans because of lack of a 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 annual revenue requirements to qualify for a loan, some loans are designed for new businesses that don’t have any sales.

Is revenue-based financing a loan?

Yes, it is a type of loan and it must be paid back.


Photo credit: iStock/Hispanolistic

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