Revenue-Based Business Loans: How Do They Work?

For many startups and growing businesses, finding funding options can be a challenge. Traditional loans often require collateral, personal guarantees or extensive credit history, which aren’t always realistic for newer businesses.

That’s where revenue-based business loans come in. Also known as revenue-based financing, these loans allow companies to borrow and repay based on a percentage of their monthly revenue, providing the capital they need to grow without giving up equity or risking personal assets.

In this guide, we’ll break down what revenue-based business loans are, how they work, the types available and the pros and cons.

What are revenue-based business loans?

Revenue-based business loans are a flexible type of funding that provides businesses with capital to fuel growth. Also referred to as “revenue-based financing,” this type of loan is ideal for startups and small businesses with steady revenue streams wanting to retain 100% ownership but don’t qualify for traditional financing.

You can technically use these loans for any expense, but they’re mostly used to expand the company in some way — often by increasing sales, developing new products or hiring additional staff. Repayments are based on a percentage of your business’s monthly revenue, which makes them a good option for companies with fluctuating income.

How do revenue-based business loans work?

Revenue-based business loans provide a fixed amount of money, which your business repays with a percentage of its monthly revenue. Let’s take a closer look at how this type of financing works.

Borrowing limits

Businesses can typically borrow between $25,000 and $10 million, depending on their annualized revenue run rate or monthly recurring revenue (MRR). An annualized revenue run rate is how much your business expects to make in the future based on past revenue. An MRR is how much your business has consistently made over the past few months.

Typically, companies can borrow up to a third of their annualized run rates or around four to seven times their MMRs.

Cost of the loan

Instead of charging interest, lenders multiply your loan amount by a number called a repayment cap, often between 1.5x and 2.5x. That means your business pays between 1.5 and 2.5 times the amount it borrows when it takes out a revenue-based financing loan, no matter how much time it takes to pay it back.

Monthly repayments and loan terms

The monthly repayment percentage runs between 1% and 3% of your business’s monthly revenue, though it can sometimes get as high as 10%. The more your business brings in each month, the faster it pays off the loan.

Revenue-based financing usually comes with longer terms, running between three and five years. Your business needs to pay off the loan within the loan term, regardless of how much money it actually brings in. And unlike with business term loans that come with interest, your business won’t save money by paying off the loan early.

Example of revenue-based business loan

Let’s say your growing e-commerce company applies for a revenue-based business loan to fund its expansion. The lender approves $200,000 in financing, with a repayment cap of 1.5x the loan amount. This rate means you will repay a total of $300,000 ($200,000 x 1.5 = $300,000).

Instead of fixed monthly payments, you’ll repay the loan by committing 3% of your company’s monthly revenue. If the company brings in $100,000 one month, you’ll pay $3,000 (3% of $100,000) toward the loan that month.

If the next month’s revenue drops to $80,000, the payment would decrease to $2,400 (3% of $80,000). The flexible repayments continue until your company has repaid the full $300,000.

5 types of revenue-based business loans

Revenue-based business loans come in several forms, each designed to cater to different types of businesses. Let’s take a closer look at five of the most common types.

Merchant cash advances

Best for: A merchant cash advance is best for businesses with steady credit card sales.
Loan Amounts: $2,500 to $500,000
Terms: Typically up to one year
Repayment Percentage: 10% to 20% of daily sales
Costs: Factor rates of 1.1x to 1.5x, meaning you pay 1.1 to 1.5 times the amount borrowed

Invoice factoring

Best for: Invoice factoring is best for B2B businesses with unpaid invoices needing immediate cash flow.
Loan Amounts: 70% to 90% of invoice value upfront
Terms: Based on invoice due dates, usually 30 to 120 days
Repayment Percentage: N/A (repaid as the invoice is collected)
Costs: Fees range from 1% to 5% of invoice value

Inventory financing

Best for: Inventory financing is best for retailers, wholesalers or manufacturers that can use inventory as collateral..
Loan Amounts: Up to 80% of inventory value
Terms: Typically 6 to 36 months
Repayment Percentage: N/A (paid in monthly installments or when inventory is sold)
Costs: May be fees for inventory appraisal, loan origination, prepayment, etc.

Royalty-based financing

Best for: Royalty-based financing is a type of revenue-based financing that’s best for technology, entertainment or product development businesses..
Loan Amounts: Typically $100,000 to $7 million
Terms: Flexible, tied to specific product or project revenue
Repayment Percentage: 1% to 10% of revenue from the project or product
Costs: 1.5x to 2.5x repayment cap, based on agreed-upon royalties

SaaS financing

Best for: Another type of revenue-based financing, SaaS financing is best for software companies with predictable subscription revenue.
Loan Amounts: $100,000 to $15 million, depending on revenue
Terms: 3 to 5 years
Repayment Percentage: 1% to 10% of MRR
Costs: Repayment caps typically range from 1.5x to 2.5x

Top revenue-based business loans

Here are our picks for the top revenue-based business loans.

Pros and cons of revenue-based business loans

To help you decide if revenue-based financing is right for your business, weigh the pros and cons.

Pros

• Keep control of your business. You won’t have to give up board seats or equity in your company to access this type of funding.
• Available to startups. Revenue-based financing is designed as an alternative to venture capital funding, providing startups with an influx of cash to help them grow.
• Flexible repayments. Repayments are based on how much you make each month, not a fixed amount like traditional term loans.
• No collateral or personal guarantee. You can get the funding you need without putting your personal or business assets on the line.

Cons

• It’s expensive. Compared to traditional term loans and lines of credit, revenue-based business loans typically aren’t cheap.
• Fees. In addition to the repayment cap, your lender might charge closing fees or an annual fee for access to funds.
• Not for brand-new businesses. While revenue-based loans might be designed for businesses still in the startup phase, many providers ask to see at least a year of monthly revenue.
• You might borrow more than you can afford. Annualized run rates can be affected by large one-time profits that won’t necessarily be reflected in future revenue.

Alternatives to revenue-based business loans

If you’re looking for other ways to fund your business, here are a few alternatives to revenue-based business loans for you to consider:

• SBA loans. SBA loans are government-backed loans designed to support small businesses. They offer competitive rates and long repayment terms but can be hard to qualify for.
• Term loans. A term loan provides a lump sum with fixed monthly payments over a set period, typically with lower interest rates than revenue-based options.
• Business lines of credit. With a business line of credit, you can access a revolving credit line that allows you to borrow and repay funds as needed, offering flexibility without fixed payments.
• Equipment financing. Equipment financing allows you to borrow money specifically to purchase equipment using the equipment itself as collateral.
• Investors. Raise capital by selling equity in your business to angel investors or venture capitalists, often in exchange for mentorship or networking opportunities.
• Tap into your personal network. Borrow money from family members and/or friends, but make sure the terms are clear or you could put the relationship at risk.

Bottom line

Revenue-based financing could be a good option for companies with steady revenue that don’t qualify for traditional funding or don’t want to give partial ownership to investors. It offers flexible repayments that vary based on your monthly revenue, so you won’t have a fixed payment each month.

However, revenue-based business loans are more expensive than traditional loans, so you’ll want to weigh the pros and cons carefully before deciding if it’s the right choice. If you’re curious about other financing options, read our business loans guide to find more ways to fund your company and compare lenders.

Frequently asked questions

Can you get a business loan based on revenue?

Yes, you can. Often referred to as “revenue-based financing,” this type of funding is based on your monthly or annual revenue. The typical requirements for revenue-based business loans include:

• Your business makes at least 50% more than it spends on production.
• You can provide proof of consistent, recurring revenue.
• You plan to use the funds to expand your business and have a clear strategy to achieve that growth.

What is the difference between revenue-based financing and equity financing?

Revenue-based financing is a loan that’s repaid with a percentage of your business revenue over time. It allows you to retain 100% ownership over the business. Equity financing involves selling ownership stakes in your company to investors in exchange for capital.

Does my business need to be profitable?

No, your business doesn’t need to be profitable to qualify for a revenue-based business loan, but it needs to meet minimum monthly or annual revenue requirements.

How much revenue does a business need to get a loan?

The amount of revenue required often varies by lender but is typically at least $15,000 per month.