Revenue-based financing (RBF) is a type of funding arrangement in which a company receives capital from an investor in exchange for a percentage of its future revenues over a defined period of time. Unlike traditional debt financing, where fixed loan payments are made regardless of the company's performance, revenue-based financing aligns the investor's returns with the company's revenue generation.
No constraints of fixed loan payments or loss of ownership associated with equity investments. Founders retain full ownership and control which allows maintain decision-making power and benefit from the company’s growth.
Often used by early-stage startups, small businesses, and companies with predictable revenue streams that may not qualify for traditional bank loans or prefer to avoid equity financing.
Quick, short-term cashflow relief. Non-dilutive funding is typically faster approved than equity funding, so you can solve immediate business problems sooner.
These funding sources often feature more flexible repayment terms than equity arrangements. They help avoid overfunding and structure payments based on revenue while maintaining control over business fundraising strategy.
Non-dilutive debt builds credit history, attracting future financing with better terms. Responsible borrowing translates to lower risk for investors.
Without equity investors, there is typically less pressure for immediate returns, allowing businesses to focus on long-term growth.
Because this form of financing is revenue-based, pre-revenue startups are generally not a fit. A revenue-based investor uses metrics such as MRR/ARR and growth projections to determine eligibility for a loan.
Venture Capital is known for shoveling out enormous amounts of cash for companies, even if they are pre-revenue. Investors in RBF deals will not provide capital that is worth more than 3 to 4 months of a company’s MRR. However, RBF investors may choose to provide follow-on rounds as a company grows, providing entrepreneurs access to more capital over time.
RBF requires monthly payments unlike equity financing. Startups may find themselves tight on cash, so it is crucial to take on a healthy amount of revenue-based financing that aligns with the company’s financial status and plans.