Last Updated on October 25, 2023 by Gerry Stewart
As an expert business loan broker with over 10 years of experience, I’ve helped countless entrepreneurs secure the funding they need to turn their dreams into reality. While traditional bank loans used to dominate the financing landscape, recent years have seen the meteoric rise of a new form of business lending – revenue-based financing.
In my opinion, revenue-based business loans represent one of the most flexible and innovative funding options available today for high-growth, cash-flow-positive companies. Instead of requiring collateral or basing approval on credit scores, these loans provide capital in exchange for a percentage of future revenue.
This unique model creates a win-win partnership between the lender and the business. The lender shares in the upside of growth, while the business gains access to capital without giving up equity or control. As someone committed to helping ambitious entrepreneurs succeed, I’m thrilled to see this outside-the-box financing solution gain traction.
Over the course of this comprehensive guide, I’ll share my insider perspective on everything you need to know about revenue-based business loans, from how they work to their key benefits and considerations.
To summarize my insights on revenue-based business loans:
- Require no collateral and focus on revenue rather than credit scores
- Payments adjust up and down based on monthly revenue performance
- Ideal for capital-intensive B2B SaaS, ecommerce, and subscription companies
- Provide non-dilutive growth capital for qualified high-growth businesses
- Lenders look for strong gross margins and 100%+ revenue growth
- Easy to understand flexible pricing model of origination fee + variable revenue share
- Quick application and approval process of just days or weeks
- Worth considering alongside other financing options
How Do Revenue-Based Business Loans Work?
Unlike traditional term loans, revenue-based financing does not come with fixed monthly repayment schedules. Instead, the business agrees to pay back a percentage of its gross revenues until the full loan amount plus fees are repaid.
For example, a company might agree to pay 8% of its monthly revenue until 2x the loan amount is repired. So if they receive a 100,000 loan, they would pay 8,000 each month once revenue reaches $100,000. The percentage and multiplier vary but often range from 5-15% and 1.25x to 2.5x.
Most providers allow businesses to cap their maximum repayment, usually between 1.25-2x the loan amount. This protects the business from overpaying if revenues spike. Once that cap is hit, the loan is considered repaid even if the revenues paid don’t add up to the original loan amount plus fees.
Repayment percentages are directly tied to the performance of the business. In healthy growth months, more is paid back. But in slower months, repayments automatically adjust lower, providing flexibility and preventing default.
The Benefits of Revenue-Based Business Loans
I’ve found revenue-based loans to be an excellent option for certain types of high-growth businesses. Here are some of the key advantages that make them worth considering:
1. No collateral required
Unlike banks, revenue-based lenders do not require any collateral to secure the loan. That means no tying up assets or property that could hinder additional financing options. This uncollateralized structure is ideal for newer companies with limited assets.
“We were able to get a large loan to fund expansion without having to put up our office space or inventory as collateral. That flexibility proved invaluable.”
2. Flexible repayment aligned with revenue
Repayment amounts fluctuate based on monthly revenue performance. If sales decline for a few months, so do payments. This flexibility prevents potentially dangerous cash flow crunches that can cripple growth.
Companies with seasonal revenue cycles also benefit from adjusting payments. Bigger checks are cut in high revenue periods, and smaller ones during slower quarters.
3. Quick approval based on revenue metrics
Because revenue-based lenders focus on top-line revenue rather than credit scores or profitability, they can approve loans much faster than traditional institutions. This speed is perfect when the opportunity is time-sensitive.
Approval criteria depend on factors like annual recurring revenue (ARR), growth rate, gross margin, churn rate, and cash runway. However, requirements are generally more flexible than conventional business loans.
4. Less dilution than equity financing
Selling a portion of equity shares in exchange for capital always leads to dilution. But with revenue-based financing, the only “ownership” stakeholders gain is a percentage of monthly revenue until repayment. No control or decision-making ability is signed over.
For many founders and investors, minimizing dilution is extremely appealing. Revenue sharing avoids unnecessarily giving up equity in a growing business.
Who Should Consider a Revenue-Based Business Loan?
I’ve seen revenue-based loans benefit several business models and stages in particular:
- SaaS & subscription companies: recurring revenue models are ideal for revenue-based lending. Predictable MRR provides confidence for lenders.
- Ecommerce & direct-to-consumer brands: impressive growth in transactions and sales makes these companies strong candidates if they are already post-revenue.
- Businesses raising a seed or Series A round: revenue loans allow founders to limit dilution by reducing the equity needed from VC investors.
- Companies with high gross margins: businesses with over 40% gross margins can comfortably afford revenue share payments. Lower margins may still qualify but require more scrutiny.
- High-growth startups: lenders look for companies with 100%+ historical yearly revenue growth and strong gross margins.
- Businesses with near-term profitability outlook: forward-looking profitability metrics add confidence for lenders to underwrite the deal.
- Companies nearing inflection points: whether it is launching a new product or expanding to new markets, revenue loans provide growth capital to capture new opportunities.
In general, B2B SaaS and digital subscription companies tend to be the best fit. But there are always exceptions. As an expert lender, I conduct in-depth evaluations to match each company with the optimal form of financing for their needs.
How Much Can Your Business Borrow?
Unlike conventional business loans that offer set limits and terms, revenue-based loan amounts are primarily calculated based on monthly recurring revenue. Here are some general guidelines on estimated loan sizes:
- Early-stage startup: 250K to 1 million
- Established startup: 1 million to 5 million
- Growth stage companies: $5 million+
However, rather than applying strict formulas, most providers offer custom solutions. Factors considered include:
- ARR (Annual Recurring Revenue)
- Gross Margin
- Cash Runway
- Burn Rate
- Churn Rate
- Total Addressable Market size
- Projected Growth
- SaaS Metrics (MRR, LTV, CAC)
- Contract Duration
- Customer Concentration
- Management Team & Experience
During initial discussions, the lender will assess your key metrics to structure a loan tailored to your business. Strong growth and consistent revenue streams can qualify companies for 7 figure-plus deals.
How Long Does the Application Process Take?
A huge advantage of revenue-based business loans is the significantly quicker application and approval timing compared to traditional loans. Here is an overview of the streamlined process:
- Initial call and application: 15-30 minutes
- Document collection: 1-2 days
- Underwriting: 3-5 days
- Term sheet: 1-3 days
- Funding: As soon as 5 days after initial contact for best-case scenarios
Because revenue-based lenders focus on top-line revenue metrics rather than scrutinizing profitability or credit history, they can move much faster. Pre-approvals are commonly provided within just a few business days.
The reputation of the lending provider also impacts timeframes. Industry pioneers with the most funding experience tend to have the quickest turnaround given their institutional knowledge.
“After our initial 30 minute call, the lender was able to provide a term sheet in just two days. We appreciated the rapid speed which enabled us to immediately capitalize on a new market opportunity.”
How Much Does a Revenue-Based Loan Cost?
Instead of featuring rigid interest rates, repayment costs with revenue-based loans are flexible based on each business’s risk profile and metrics. Here are some typical ranges:
- Origination fee: 1-5%
- Revenue share paid: 5-15%
- Total repayment cap: 1.25x – 2.5x loan amount
For a 1 million loan, a company might pay a 2% origination fee (20,000), 8% in monthly revenue share until hitting a 1.8x repayment cap ($1.8 million total repaid).
Companies deemed very low risk may qualify for rates at the lower end of these ranges, while higher-risk companies get placed at the upper end. The overall cost aims to align with the company’s growth outlook.
Compare this pricing to equity rounds which often sell 20% or more company ownership in exchange for capital. Revenue sharing may cost more than traditional debt but enables you to maintain control.
Pros and Cons of Revenue-Based Business Loans
- Non-dilutive capital: Revenue-based business loans provide funding without requiring business owners to give up ownership equity, allowing them to maintain control over their company.
- Fast application and funding timelines: The application process for revenue-based loans is typically quicker and more streamlined than traditional loans, making it an attractive option for business owners in need of rapid capital infusion.
- Flexible repayments tied to revenue: These loans offer repayment structures that align with a business’s revenue, making it easier for business owners to manage their cash flow, especially during slow months or seasonal fluctuations.
- No collateral required: Revenue-based financing usually doesn’t demand collateral, reducing the risk for business owners who might not have valuable assets to secure the loan.
- Prioritizes top-line revenue metrics: These loans consider the business’s revenue performance as a key factor, making them accessible for companies with solid sales numbers, even if they lack extensive assets.
- Higher loan amounts than other alternative financing: Revenue-based loans often provide higher funding amounts compared to other alternative financing options, which can be beneficial for businesses with ambitious growth plans.
- More expensive than conventional debt: Revenue-based financing can be costlier compared to traditional debt financing due to the revenue-sharing component. Business owners need to consider the long-term cost implications.
- Service business models and paper-thin margins don’t qualify: Businesses with service-oriented models or very slim profit margins may not meet the criteria for revenue-based loans, limiting their options.
- Only works for companies that already have revenue: These loans are typically not suitable for startups or businesses in their early stages, as they require a demonstrated track record of revenue.
- Requires giving up a percentage of revenue: Business owners should be prepared to share a portion of their future revenue with the lender, which could affect their financials and decision-making.
- Hard to predict total repayment cost: The variability of revenue-based loan repayments can make it challenging for business owners to precisely forecast their total repayment amount over time.
In my experience, revenue-based business loans can be an attractive option for established businesses with solid revenue streams looking to expand.
However, it’s crucial for business owners to carefully evaluate their specific circumstances and financing needs, as well as consider alternative financing options, like lines of credit or traditional debt financing.
This thoughtful assessment ensures they make the right choice for their unique situation, balancing the advantages and disadvantages of revenue-based financing.
These considerations are especially relevant for businesses with seasonal fluctuations in revenue, where flexible repayment terms could be a valuable asset.
|Traditional Bank Loans||Equity Financing||Revenue Based Loans|
|Based on credit score||Sell ownership stake||Based on revenue growth|
|Require collateral||High dilution||No collateral required|
|Inflexible set payments||Loss of control||Payments vary based on revenue|
|Slow application process||Permanent decision||Fast approvals|
|Focus on risk mitigation||Exit focused||Growth focused|
|Set limits on the amount||Large sums possible||Loan size linked to MRR|
|Lower risk tolerance||Higher risk appetite||Moderate risk appetite|
Tips for Qualifying and Applying
Here are my top 5 tips for businesses considering a revenue-based loan:
1. Highlight rapid historical growth
Lenders want to see 100%+ YoY revenue growth to demonstrate market traction. Emphasize this in your pitch.
2. Provide clear visibility into future growth
Present your go-to-market strategy, new products in the pipeline, customer acquisition plans, or other growth levers you can activate.
3. Have clean financial statements
Maintain orderly books and records. This increases trust in your numbers and metrics.
4. Build relationships
Get introductions to lenders through colleagues, advisors, banks, or VCs. A warm outreach goes further than a cold call.
5. Be prepared to act fast
Have your data organized and your pitch refined for a quick engagement. Speed matters when opportunities arise.
Evaluating the Best Providers
Because revenue-based lending is still a nascent industry, lender options are limited but growing. When assessing providers, look for these key traits:
- Experience with your business model – SaaS, ecommerce, and subscriptions are ideal niches
- Funding history and loan volume – Higher is better as it indicates repeat borrowers
- Flexibility – Structuring custom solutions tailored to your needs
- Transparency – Clear terms, rates, and quick communication
- Partnership approach – Collaborative spirit focused on your success
I recommend speaking to 3-5 lenders to find the right match. Having multiple term sheets also provides leverage to negotiate the best possible deal.
|The rise of remote and hybrid work models to fuel SaaS adoption||Gartner predicts that the spending on public cloud services is forecast to grow 20.7% to a total of $591.8 billion by 2023||Gartner|
|AI to become a standard feature in SaaS products||According to IDC, worldwide revenues for the AI market are expected to reach $554.3 billion by 2024, with a compound annual growth rate (CAGR) of 17.5% from 2019 to 2024||IDC|
|Wider adoption of vertical SaaS solutions for specific industries||The global vertical SaaS market size is projected to reach $184.8 billion by 2026, registering a CAGR of 27.9% from 2019 to 2026||LeadZen|
|APIs to continue streamlining digital transformation and integration||The global API management market size is expected to grow from $3.0 billion in 2020 to $6.2 billion by 2025, at a CAGR of 15.1%||Custom Market Insights|
Case Study 1: SaaS Company Raises $5 Million
One recent client, the CEO of a B2B SaaS company, approached me seeking capital to accelerate expansion into new market segments.
Despite strong revenue growth and an impressive customer roster, their thin margins and lack of hard assets made traditional bank financing difficult. After reviewing their metrics, I determined that a revenue-based loan could provide over $5 million in growth capital without dilution.
Because of their sticky subscription model and negative churn, the lender approved a competitive 8% revenue share with a 1.8x cap. The flexible repayment structure enabled the company to ramp up sales and marketing spending to attack new verticals. Within 9 months, they had grown revenue by 80% and added major enterprise accounts.
By year 2, the cap was reached early, allowing the company to eliminate repayments ahead of schedule. The injected capital propelled transformational growth, making the revenue share well worth the cost.
For high trajectory SaaS firms like this, revenue-based loans can provide rocket fuel without forcing founders to give up equity too early.
Case Study 2: Ecommerce Brand Secures Inventory Financing
Another ecommerce client selling mattresses online was facing a common challenge – managing high upfront inventory costs. With a long production cycle but quick delivery expectations, substantial cash flow was tied up in unsold inventory.
Despite strong sales growth, this cash crunch restrained their ability to support demand and acquire customers cost-effectively via paid ads. With the brand already profitable on a per-unit basis, I advised that a revenue-based loan could free up cash flow for expansion.
We selected a lending partner who specialized in inventory financing for ecommerce. They provided a $2 million loan at a 10% revenue share. The flexible payments allowed the company to significantly boost advertising spending at critical seasonal periods to drive conversions.
Within a year, the brand doubled its sales. The fixed cost of goods on each incremental unit also doubled their net income. With their revenue share cap achieved in under 18 months, it proved a worthwhile financing catalyst.
For ecommerce businesses, revenue-based loans enable inventory that can turn sales growth potential into reality.
What Others Are Saying About Revenue-Based Loans
Revenue-based loans have gained popularity among many entrepreneurs who have shared their positive feedback on various online platforms. Here are some of the highlights from their feedback:
- Revenue-based loans helped them grow their business without sacrificing a percentage of ownership or control to investors. They appreciated the flexibility and autonomy that this financing option offered them.
- Revenue-based loans were easier to obtain than bank loans or equity financing, especially for businesses with low credit scores or limited assets. They praised the simple application process and the fast approval time that enabled them to seize new opportunities.
- Revenue-based loans provided them with enough capital to cover their initial investment, inventory costs, marketing expenses, or outstanding invoices. They valued the ability to access higher loan amounts than other alternative financing options1.
- Revenue-based loans allowed them to repay the loan faster or slower depending on their revenue performance, which was helpful for seasonal businesses or businesses facing unexpected challenges. They liked the flexibility and alignment of repayment with their cash flow.
- Revenue-based loans were transparent and straightforward in terms of their financing model and terms, unlike some other alternative financing options. They trusted the partnership and support of the lender, who had a vested interest in their success.
I’ve seen revenue-based lending fill a critical gap for companies not well served by conventional models. This innovative approach to linking financing with revenue growth offers businesses more financial flexibility and control.
The future success of any company hinges on a smart capital strategy. I hope this transparent and comprehensive guide has provided valuable insights into how revenue-based loans can fit into your financing mix as you scale.
As always, I’m here to help analyze the best funding strategies specific to your company’s needs and goals.
To learn more about these options, please call us at (888) 653-0124 today!
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