Business Loans

What is Revenue-Based Financing?

Jan 04, 2023 • 5 min read
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      New small business owners often need funding to meet their goals. However, they frequently struggle to qualify for debt and equity financing because of a bad credit score or a limited operating history.

      Revenue-based financing is an alternative method of raising capital that’s often more accessible. If you’re interested in the arrangement, here’s what you should know before you apply, including how it works and when it’s worth using.

      What is Revenue-Based Financing?

      Revenue-based financing is another name for a business cash advance. Like a business loan, it provides a lump sum you can use to grow your company. You then repay the original amount plus a fee with daily or weekly bank account withdrawals based on a percentage of your monthly deposits.

      Revenue-based financing arrangements are relatively accessible and can provide funding quickly, but they’re also expensive. As a result, they’re usually best for business owners who can’t access traditional sources of capital.

      How Does Revenue-Based Financing Work?

      Revenue-based financing arrangements serve a similar purpose to business loans, but their structure and terms are significantly different. Here’s how they work.

      Qualification Requirements

      Revenue-based financing is much easier to access than traditional forms of business funding. You typically only need to meet minimal personal credit score, time-in-business, and monthly bank deposit requirements to qualify for an account.

      For example, Credibly’s business cash advance has the following eligibility criteria:

      • 500+ personal credit score
      • 6+ months in business
      • $15,000+ average monthly bank deposits

      Applying for revenue-based financing is also much faster than requesting other forms of funding. You can often complete your application in minutes, receive a response within a day, and have your funds in around 48 hours.

      Financing Terms

      Terms vary between providers, but revenue-based financing can generate significant capital. Your proceeds primarily depend on your average monthly deposits. The more you earn, the more you can borrow. 

      For example, Kapitus offers advances between $10,000 and $750,000, and Backd may offer up to $2 million. Your actual amount is typically between three and six times your gross monthly revenue.

      Despite the high borrowing potential, revenue-based financing follows a much shorter repayment term than a small business loan. Most arrangements are between 3 and 18 months, though some can be as long as 36 months.

      Meanwhile, financing charges are usually higher than with traditional funding options. In addition, they’re presented as a factor rate rather than an interest rate, and you can expect them to range from around 1.2 to 1.5.

      In other words, if you borrow $100,000, you’ll usually repay between $120,000 and $150,000.

      Repayment Process

      Another notable difference between revenue-based financing and a business loan is the repayment process. Instead of making fixed monthly principal and interest payments, you let your funder take a portion of your sales.

      Typically, they’ll withdraw a fixed percentage of your average monthly revenue directly from your bank account, either daily or weekly.

      For example, your business earns $30,000 monthly, and you take out a $100,000 business cash advance. Your funder takes 10% per month, which equals $3,000. Assuming each month has 20 business days, they withdraw $150 daily.

      When is Revenue-Based Financing Worth Using?

      Revenue-based financing is worth considering when traditional business financing options are unsuitable for your situation. Typically, that’s because you can’t qualify for them due to your credit scores or time in business.

      New small business owners and startup founders often face this issue because traditional financial institutions usually want to see at least two years of business history. They may check your business credit score too, which also takes time to establish.

      As a result, a business cash advance is often an attractive funding option in the early years. However, because revenue-based financing is expensive, consider all your other options first.

      If you can’t get a business loan from a bank or credit union, an online lender may still be willing to work with you. They have less rigorous qualification requirements that are closer to those of revenue-based funders.

      Alternatively, you can consider equity financing options, such as angel investors and venture capitalists. These require that you give up a portion of your company ownership, but they also provide you with valuable allies who can help you grow.

      Explore Your Options With Lendio

      Revenue-based financing can be an effective alternative to traditional debt and equity options, especially for new small business owners with bad credit scores. You can quickly access a significant amount of capital and use it to grow your business.If you’re a good fit for revenue-based financing, use Lendio to find the best cash advance provider for your needs. Sign up to compare offers from multiple funders and apply for financing today!

      Quickly Compare Loan Offers from Multiple Lenders

      Applying is free and won’t impact your credit.

      About the author
      Nick Gallo, CPA

      Nick Gallo is a Certified Public Accountant and content marketer for the financial industry. He has been an auditor of international companies and a tax strategist for real estate investors. He now writes articles on personal and corporate finance, accounting and tax matters, and entrepreneurship.

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