Revenue-based financing: repayments that move with your sales

Revenue-based financing gives you a lump sum that you repay as a fixed share of your revenue until you have paid back an agreed total, usually the amount advanced times a set multiple. Payments rise in good months and fall in slow ones. There is no equity given up, but there is also no interest rate, so you have to work out the APR yourself at the pace you expect to repay.

How it works

Three terms define the deal:

1. The amount advanced. What lands in your account, after any fees.
2. The cap or multiple. The total you will repay, often expressed as a multiple like 1.2 (repay $120,000 on $100,000).
3. The revenue share. The percentage of monthly or weekly revenue that goes to the provider until the cap is reached.

Because payments are a share of revenue, there is no fixed term, only an estimated one. New York's law treats any deal "repaid by the recipient to the provider, over time, as a percentage of sales or revenue" as sales-based financing, which puts revenue-based financing in the same category as many merchant cash advances. In New York, providers must disclose an estimated annual percentage rate and an estimated term for those deals.

How the cost works

The dollar cost is fixed: the cap minus what you received. The APR depends on how fast you repay.

Take $100,000 with a 1.2 multiple, so $120,000 to repay and a $20,000 cost. If revenue runs at a pace that clears it in 12 months with weekly payments, that is 52 payments of $2,307.69 and an APR of about 37%. If revenue jumps and you clear it in 6 months, the same $20,000 costs about 73% APR on a weekly schedule, because you held the money for half as long. If revenue slows and it takes 18 months, the APR falls to about 25% on a daily-collection basis.

These figures come from the same engine as our MCA APR calculator: APR is the nominal annual rate on the amount you actually receive. Enter your multiple and your realistic repayment time to see your own number.

Estimating your own term

You can estimate the term with one division: the total to repay divided by what the revenue share collects in a normal month. On $100,000 at a 1.2 multiple, $120,000 is due. If the business takes $100,000 a month and the share is 10%, the provider collects about $10,000 a month, so the deal runs about 12 months. At a 5% share it runs about 24 months, with half the monthly payment and a lower APR, but twice as long with a slice of every sale committed. Do the sum for a slow month as well as a normal one, so you know the range before you sign.

Sterling's take: estimate the term from a normal month, not your best one. A projection built on peak revenue makes the deal look cheaper and the payments look smaller than they will be.

Who it suits

• Businesses with steady, documented revenue that swings by season or by month: e-commerce, subscription and software businesses, and some retail.
• Owners who would rather pay more in total than face a fixed payment in a slow month.
• A need with a clear return, such as inventory ahead of a peak, marketing spend you can measure, or a hire that pays for itself.

Who it doesn't suit

• A business with thin margins. If a revenue share of, say, 8% eats most of your profit, the slow month you were protecting yourself from arrives anyway.
• A need for long-lived assets. A machine that earns for five years belongs in equipment financing.
• An owner planning to repay fast. If you expect to clear it in a few months, a short term loan or a line of credit may cost less per year.

What providers look at

• Revenue history and consistency. Bank statements, and for online businesses often a direct connection to payment processors or sales platforms.
• Gross margin. The revenue share has to be affordable after cost of goods.
• Time in business. A longer history makes the estimated term more reliable.
• Existing financing. Another provider already taking a share of revenue reduces what is left.
• The owner's credit, which many providers check alongside business data.

Red flags

• A cap or multiple that isn't stated as a dollar total in the agreement.
• A revenue share that applies to gross deposits including transfers, refunds or loan proceeds, not just sales.
• A minimum payment that kicks in when revenue drops, which quietly turns a flexible product into a fixed one.
• A reconciliation clause you can't use in practice. If payments are meant to fall with revenue, find out exactly how you ask for an adjustment and how fast it happens.
• Fees deducted from the advance that weren't in the first quote.

How it compares

For a broader view of short-term options, see working capital financing.