Learn how revenue based financing works and if it’s right for your business. Simple guide with real examples and honest pros and cons.
Table of Contents
Introduction
Do you own a small business and need money to grow, but banks keep saying “no”?
Here’s the problem: Banks want perfect credit scores, lots of paperwork, and your house as backup. But what if there was a way to get money based on how much your business actually makes?
That’s where revenue based financing comes in. Think of it like getting an advance on your future sales – but without the headaches of traditional loans.
This matters because many good businesses can’t get bank loans, even when they’re making money every month. Revenue based financing could be the answer you’ve been looking for.
In this article, you’ll learn:
- What revenue based financing really is (in super simple words)
- How it works step-by-step
- Real examples of businesses that used it
- How much it costs (the honest truth)
- Whether it’s right for YOUR business
- How to find the best deals
Let’s turn your business dreams into reality!
What is Revenue Based Financing?
Revenue based financing is like getting money now and paying it back from your future sales. It’s not a loan – it’s more like selling a small piece of your future income.
The Simple Explanation
Imagine your lemonade stand makes $100 every week. A revenue based financing company might say:
“We’ll give you $1,000 right now. In return, you give us 10% of everything you make until you’ve paid us back $1,200.”
So every week, instead of keeping all $100, you’d give them $10 and keep $90. After 120 weeks (when you’ve paid $1,200), you’re done!
How It’s Different from Bank Loans
Bank loan says: “Pay us $50 every month for 24 months, no matter what.”
Revenue based financing says: “Pay us 10% of what you make. If you make more, you pay more. If you make less, you pay less.”
The big difference: Your payments go up and down with your business income!
Real Business Example
Meet Sarah who owns a small bakery:
Sarah’s situation:
- Makes $5,000 per month on average
- Wants $25,000 to buy new equipment
- Bank said no because she’s only been open 18 months
Revenue based financing deal:
- Company gives Sarah $25,000
- She pays back 12% of monthly revenue
- Total payback: $35,000 (factor of 1.4)
How it worked:
- Good month ($6,000 sales): Sarah pays $720
- Slow month ($3,000 sales): Sarah pays $360
- Average payment: $600 per month
- Paid off in about 4 years
Sarah loved it because her payments matched her income!
How Revenue Based Financing Works Step by Step
Let’s break this down so it’s super easy to understand:
Step 1: You Apply
What you need:
- Business bank statements (usually 6-12 months)
- Proof of monthly revenue
- Basic business information
- No perfect credit score required!
What they look for:
- Steady monthly income
- Growing or stable business
- Usually need $10,000+ monthly revenue
- Business open for at least 6 months
Step 2: They Review Your Money
The company looks at your bank statements to see:
- How much money comes in each month
- If your income is steady or growing
- What your expenses look like
- How healthy your business is
This usually takes 1-5 days (much faster than banks!)
Step 3: You Get an Offer
If approved, they’ll offer you a deal like:
- Funding amount: $50,000
- Factor rate: 1.3 (you pay back $65,000 total)
- Revenue percentage: 15% of monthly revenue
- Time estimate: 18-30 months to pay back
Step 4: Money Hits Your Account
Once you accept:
- Money arrives in 1-7 days (super fast!)
- No restrictions on how you use it
- Start paying back immediately
- Payments come automatically from your account
Real Example: Pizza Shop
Tony owns a pizza restaurant:
Month 1: Makes $8,000 → Pays $800 (10%) Month 2: Makes $12,000 → Pays $1,200 (10%) Month 3: Makes $6,000 → Pays $600 (10%) Slow month: Makes $4,000 → Pays $400 (10%)
Tony loves this because:
- High sales months = higher payments (when he can afford it)
- Low sales months = lower payments (when he needs cash flow)
- No fixed monthly payment to worry about
According to Fundera, the average revenue based financing deal ranges from $10,000 to $500,000.
Types of Revenue Based Financing
Not all revenue based financing is the same. Here are the main types:
Traditional Revenue Based Financing
What it is: You pay a percentage of ALL your business revenue.
How it works:
- Company gets 5-20% of everything you make
- Includes all sales, services, online, in-person
- Usually based on bank deposits
Example: Restaurant pays 12% of all sales until $40,000 is repaid.
Good for: Businesses with predictable, steady income.
Merchant Cash Advances (MCA)
What it is: Money advance based on credit card sales only.
How it works:
- Company gives you cash now
- Takes percentage of credit card sales
- Usually daily payments
- Higher cost than traditional RBF
Example: Retail store gets $20,000, pays back 18% of daily credit card sales.
Good for: Businesses that mostly take credit cards.
Warning: Usually more expensive than other options!
Online Revenue Based Financing
What it is: Financing based on online sales and digital revenue.
How it works:
- Perfect for e-commerce businesses
- Connects to your online store
- Payments based on digital sales only
- Often has lower rates
Example: Online clothing store pays 8% of website sales to pay back $30,000.
Good for: E-commerce, SaaS, online service businesses.
Seasonal Revenue Based Financing
What it is: Special deals for businesses with seasonal ups and downs.
How it works:
- Payments adjust for busy and slow seasons
- Higher payments during peak season
- Lower (or no) payments during off-season
- Longer payback periods
Example: Pool cleaning business pays 15% in summer, 5% in winter.
Good for: Ice cream shops, landscaping, holiday businesses.
Who Should Consider Revenue Based Financing?
This isn’t right for everyone. Let’s figure out if it makes sense for YOU:
Perfect Candidates
You’re a great fit if:
- Your business makes $10,000+ per month consistently
- You’ve been open for at least 6 months
- You need money fast (within a week)
- Banks have rejected your loan applications
- Your credit isn’t perfect
- You want payments that match your income
Business types that work well:
- Restaurants and food service
- Retail stores
- E-commerce businesses
- Service companies (plumbing, cleaning, etc.)
- SaaS and tech companies with recurring revenue
Not a Good Fit
Skip this if:
- Your business is brand new (under 6 months)
- Your monthly revenue is under $8,000
- Your income varies wildly month to month
- You can get a cheaper bank loan
- You don’t actually need the money urgently
Business types that struggle:
- Very seasonal businesses (unless seasonal RBF)
- Businesses with mostly cash sales
- Very new startups
- Businesses losing money each month
Real Success Story
Mike’s Auto Repair Shop:
Before RBF: Mike needed $35,000 for new equipment but had bad credit from a past business failure.
The deal:
- Got $35,000 in 4 days
- Pays 14% of monthly revenue
- Factor rate of 1.35 ($47,250 total payback)
Results after 1 year:
- New equipment brought in 40% more customers
- Monthly revenue grew from $15,000 to $21,000
- Extra income easily covered the payments
- Will be paid off 6 months early
Mike says: “Best business decision I ever made. The bank would never have helped me, but this changed everything.”
How Much Does Revenue Based Financing Cost?
Let’s be honest about money – this isn’t the cheapest option, but it might be worth it.
Understanding Factor Rates
Instead of interest rates, RBF uses “factor rates.”
How it works:
- Factor rate of 1.2 means you pay back $1.20 for every $1.00 borrowed
- Factor rate of 1.5 means you pay back $1.50 for every $1.00 borrowed
Example:
- Borrow: $50,000
- Factor rate: 1.3
- Total payback: $65,000
- Cost: $15,000
Typical Costs
Factor rates usually range:
- Low risk businesses: 1.1 to 1.3 (10% to 30% total cost)
- Medium risk: 1.3 to 1.5 (30% to 50% total cost)
- Higher risk: 1.5 to 1.8 (50% to 80% total cost)
What affects your rate:
- How long you’ve been in business
- Monthly revenue amount
- Revenue stability
- Industry type
- Credit score (matters less than banks, but still counts)
Real Cost Comparison
Let’s compare a $30,000 funding need:
Bank loan (if you qualify):
- 8% interest for 3 years
- Monthly payment: $939
- Total paid: $33,804
- Total cost: $3,804
Revenue based financing:
- Factor rate: 1.4
- 12% of revenue monthly
- Total payback: $42,000
- Total cost: $12,000
The trade-off: RBF costs more, but you get:
- Money when banks say no
- Payments that match your income
- Much faster approval
- No personal guarantees usually
According to Small Business Administration research, alternative financing like RBF typically costs 2-4 times more than traditional bank loans, but serves businesses that can’t get bank approval.
Pros and Cons of Revenue Based Financing
Let’s be totally honest about the good and bad:
The Good Things (Pros)
Fast and easy approval:
- Get money in 1-7 days
- Less paperwork than banks
- No perfect credit required
- Based on business performance, not personal finances
Flexible payments:
- Pay more when business is good
- Pay less when business is slow
- No fixed monthly payment stress
- Payments automatically adjust
No personal guarantees:
- Usually don’t risk your house or car
- Business revenue is the collateral
- Less personal financial risk
Use money however you want:
- No restrictions on spending
- Equipment, inventory, marketing, anything
- No need to justify purchases
The Bad Things (Cons)
More expensive than bank loans:
- Factor rates can be high (30-80% total cost)
- Much pricier than traditional financing
- Eats into your profits
Takes percentage of ALL revenue:
- Even if you’re having a great month, you still pay
- Reduces your cash flow permanently until paid off
- Can limit growth if payments are too high
Can create cash flow problems:
- If business slows down significantly, payments continue
- Daily or weekly payments can feel overwhelming
- Might need another advance to cover operations
Limited regulation:
- Less consumer protection than bank loans
- Some companies have unfair terms
- Need to research companies carefully
When It Makes Sense vs. When It Doesn’t
Use RBF when:
- You need money fast for a growth opportunity
- Banks have rejected you
- The extra revenue will easily cover the cost
- You have steady, predictable income
Avoid RBF when:
- You can get a cheaper bank loan
- Your margins are already thin
- You don’t have a clear plan to increase revenue
- You’re just trying to stay afloat (not grow)
How to Find the Best Revenue Based Financing Deal
Shopping around can save you thousands! Here’s how to find the best deal:
Step 1: Know Your Numbers
Before you apply anywhere, calculate:
- Your average monthly revenue (last 12 months)
- Your monthly expenses
- How much funding you actually need
- What you’ll use the money for
- How the investment will increase your revenue
Step 2: Research Multiple Companies
Popular RBF companies:
- Fundbox
- BlueVine
- Kabbage (now part of American Express)
- Clearco (for e-commerce)
- Lighter Capital (for SaaS businesses)
Check each for:
- Factor rates offered
- Revenue percentage requirements
- Speed of funding
- Customer reviews
- Better Business Bureau ratings
Step 3: Compare Offers Carefully
Don’t just look at the factor rate! Compare:
Total cost example:
- Company A: Factor 1.3, 15% revenue share
- Company B: Factor 1.2, 20% revenue share
Company B might cost less total BUT take longer to pay off because of the higher percentage.
Step 4: Read the Fine Print
Watch out for:
- Hidden fees (origination, processing, etc.)
- Personal guarantees (avoid if possible)
- Confessions of judgment (very dangerous!)
- Automatic renewal clauses
- Prepayment penalties
Red Flags to Avoid
Run away if they:
- Guarantee approval before seeing your financials
- Ask for money upfront
- Won’t clearly explain the total cost
- Pressure you to sign immediately
- Have lots of complaints online
- Require confession of judgment
Real Shopping Example
Maria needed $40,000 for her catering business:
Company 1 offer:
- Factor rate: 1.4 ($56,000 total)
- 18% revenue share
- Estimated 15 months to pay off
Company 2 offer:
- Factor rate: 1.35 ($54,000 total)
- 12% revenue share
- Estimated 22 months to pay off
Maria chose Company 2 because:
- Lower total cost ($2,000 less)
- Smaller monthly payments (better cash flow)
- More time to pay meant less stress
Alternatives to Revenue Based Financing
Before you commit, consider these other options:
Business Credit Cards
Good for: Smaller amounts ($5,000-$50,000) Pros:
- 0% intro rates sometimes
- Build business credit
- Flexible repayment
Cons:
- High rates after intro period
- Need decent credit
- Can hurt personal credit if business card
Equipment Financing
Good for: Buying specific equipment Pros:
- Lower rates than RBF
- Equipment is collateral
- Longer repayment terms
Cons:
- Can only buy equipment
- Takes longer to approve
- Equipment must hold value
Invoice Factoring
Good for: B2B businesses with invoices Pros:
- Get paid on outstanding invoices immediately
- No debt created
- Improves cash flow fast
Cons:
- Only for businesses with invoices
- Customers know you’re factoring
- Ongoing costs
SBA Loans
Good for: Established businesses with good credit Pros:
- Very low rates (4-8%)
- Long repayment terms
- Government backed
Cons:
- Slow approval (2-6 months)
- Lots of paperwork
- Strict requirements
Friends and Family
Good for: Small amounts, close relationships Pros:
- Usually cheapest option
- Flexible terms
- People who believe in you
Cons:
- Can damage relationships
- Limited amounts usually
- Awkward if business struggles
Real Decision Process
Tom needed $25,000 for his landscaping business:
Considered:
- Bank loan: Rejected (credit issues)
- SBA loan: Too slow (needed money before spring season)
- Family loan: Not enough available
- Equipment financing: Only covered half his needs
- Revenue based financing: Got approved for full amount
Tom’s choice: RBF because he needed money fast and it was his only option for the full amount.
Success Tips for Using Revenue Based Financing
If you decide RBF is right for you, here’s how to make it work:
Before You Apply
Prepare your paperwork:
- 12 months of bank statements
- Tax returns (business and personal)
- Profit and loss statements
- Business plan for the money
- List of what you’ll buy/invest in
Clean up your finances:
- Pay down existing debts if possible
- Make sure bank statements look good
- Gather proof of steady revenue
- Document any seasonal patterns
After You Get the Money
Use it wisely:
- Stick to your original plan
- Invest in things that will increase revenue
- Track your return on investment
- Don’t use it for personal expenses
Manage cash flow:
- Budget for the revenue sharing payments
- Keep extra cash reserves
- Monitor your profit margins closely
- Consider seasonal variations
Pay it off faster if possible:
- Most RBF allows early payoff
- Use extra revenue to pay down faster
- Reduce total interest costs
- Free up cash flow sooner
Real Success Strategy
Lisa used RBF to grow her online store:
The plan:
- Borrowed $50,000 at 1.3 factor rate
- Invested in inventory and marketing
- Targeted 50% revenue increase
The execution:
- Spent $35,000 on popular inventory
- Spent $15,000 on Facebook ads
- Tracked results daily
- Adjusted strategy monthly
The results:
- Revenue grew from $20,000 to $32,000 per month
- Extra $12,000 monthly easily covered $2,400 RBF payment (12%)
- Paid off 8 months early
- Total profit from investment: $89,000
Lisa’s advice: “Have a clear plan for exactly how you’ll use the money to make more money. Don’t just hope for the best.”
Conclusion
Revenue based financing can be a great tool for businesses that need money fast and can’t get traditional bank loans. It costs more, but it gives you flexibility that banks don’t offer.
Remember the key points:
- Your payments go up and down with your income
- It costs more than bank loans but works when banks say no
- You need steady monthly revenue ($10,000+ usually)
- Get multiple quotes and read the fine print
- Use the money to grow revenue, not just survive
- Have a clear plan for how you’ll pay it back
The honest truth: This isn’t cheap money, but it can be smart money if used right. Many businesses have used RBF to grow when they had no other options.
Your next step: If this sounds right for you, start by gathering 12 months of bank statements and calculating your average monthly revenue. Then research 3-5 companies and get quotes.
Don’t wait for the “perfect” time – if you have a solid plan to use the money to grow your business, revenue based financing might be exactly what you need to take things to the next level!
Disclaimer
This article is for educational purposes only and is not professional financial advice. Revenue based financing can be expensive and risky. Every business situation is different. Before making any financing decisions, consider talking with a qualified business financial advisor or accountant who understands your specific situation. The author is not responsible for any business or financial decisions you make based on this information. Always read all terms and conditions carefully before signing any financing agreements.