If your business has consistent revenue and you want flexibility in how much you repay each month, a business loan based on revenue might be a way to get the capital your company needs.
What Is a Revenue-Based Loan?
A business loan based on revenue lets a business borrow money in exchange for a percentage of future revenues.
Instead of a fixed monthly payment, these loans are repaid based on a percentage of the business’s revenue. Monthly payments may fluctuate from one month to the next, depending on revenues.
How Business Loans Based on Revenue Work
To determine your eligibility for a loan based on revenue, the lender will primarily look at your finances and projected revenues. Some lenders may consider time in business and creditworthiness, but in most cases, your credit history and credit score probably won’t matter at all.
The lender may connect to your business’ payment software like Stripe or Xero to view your financial and sales history. They’ll use this data to create revenue forecasts to determine eligibility.
Once the lender determines how much you're eligible to borrow and the loan is finalized, you’ll receive the funds. There are many ways you could use the money, but the end result should be sales and revenue.
You make a payment each month against what you owe, but the payment amounts may change based on your monthly revenue. You'll pay more in months when revenues are higher, and less during slower periods. You'll make payments until the loan and fees are paid off.
Who Are Business Loans Based on Revenue Good For?
Business loans based on revenue could be well-suited for businesses with seasonal fluctuations in sales. It could also be a good fit for ecommerce or subscription-based businesses with predictable revenues that need quick financing. That’s because these loans can be processed in days, rather than weeks.
Revenue-based loans may be good for startups and early-stage businesses that haven’t built up the credit history necessary to qualify for traditional loans. The caveat is that you need to have revenue to qualify. If you’re an early-stage startup that isn’t making sales yet, this kind of loan might not be the best fit.
Pros of Revenue-Based Loans
Here are a few reasons to consider business loans based on revenues.
- No fixed monthly payment amount
- Fast access to funds
- No equity dilution (you don’t have to sign over a percentage of ownership of your company in exchange for the loan)
No Fixed Monthly Payments
With a loan based on revenues, payments adjust according to the amount of money your business is bringing in. In a slow month, your required payment would be lower. In peak season, your required payment would be higher.
Faster Access to Funds
Lenders look at revenue metrics (via software and analytics) and business health rather than credit scores and time in business. They can often process applications faster. That means you get your money quicker.
No Equity Dilution
A business loan based on revenue isn't the same thing as equity financing. In equity financing, investors become part owners of the business. Revenue-based loans don’t require giving up any ownership, so as the business owner you maintain full control.
Cons of Revenue-Based Loans
Be aware of a few drawbacks with business loans based on revenue.
- Higher costs than traditional loans
- Shorter repayment terms
- Uncertain cash flow
Higher Costs Compared to Traditional Loans
The total repayment amount for a revenue-based loan can end up being higher than a comparable traditional term loan. Revenue-based loans tend to have higher interest rates than traditional loans because they are riskier for the lender.
Shorter Repayment Terms
Revenue-based loans have shorter repayment periods, typically three to five years. You'll need to generate enough revenue during that time to pay off the loan. Loan payments, even though based on revenues, may be higher compared to traditional loans with longer repayment periods. High payments could strain your cash flow.
Uncertain Cash Flow
The amount you'll pay toward the loan can vary from one month to the next, especially if your revenue fluctuates. That can make it difficult to project cash flow and pay for other expenses.
How to Qualify for Revenue-Based Business Loans
If the flexibility of business loans based on revenue is appealing to you, here's what you need to do to qualify for one.
Revenue Requirements
You'll need to prove that you have revenue at a certain level to qualify for a revenue-based loan. Consistent revenue could make it easier to qualify. If your revenue fluctuates, the lender will likely want to know what causes the fluctuations, such as seasonality.
Revenue requirements vary. One lender might want to see at least $10,000 in monthly recurring revenue for the past six months. Another may require that you had $100,000 or more in recurring revenue last year. If you don’t meet the requirements of one lender, keep looking.
Be prepared to show several years of financial statements to demonstrate your business' cash flow. You’ll also need to grant the lender access to your financial software.
Industries That Benefit the Most
Business loans based on revenue are best suited for companies with predictable revenue streams. For example, e-commerce, SaaS (software-as-a-service), and subscription-based businesses.
Should You Consider Revenue-Based Loans?
How do you know if business loans based on revenue are right for your business? Here are three boxes to check:
- You're ready to fund your business growth
- You have a seasonal or cyclical business
- You need cash flow flexibility
You’re Ready to Fund Your Business Growth
If your business is thriving but you're hesitant to take on a loan with a fixed monthly payment, a revenue-based loan could provide the capital and flexibility you need to take your company to the next level.
You Have a Seasonal or Cyclical Business
Businesses with revenue spikes and dips during specific times of the year, such as tourism, retail, or event-based companies, could find it difficult to qualify for traditional financing. Seasonal or cyclical changes in revenue won't disqualify you from this kind of loan.
You Need Cash Flow Flexibility
When your cash flow varies each month and you don't want the pressure of fixed-loan repayments, a revenue-based loan can create that balance between getting cash and having flexibility in how you pay it back.
Alternative Financing Options to Consider
Revenue-based business loans may not be your only option to get the capital you’re looking for. Explore these options as well to determine which is the best fit.
Traditional Term Loans
Traditional term loans, typically offered by banks, credit unions, and online-only lenders, may come with lower interest rates compared to revenue based loans. The payment amount will be fixed for the entire repayment period. Credibly is one example of a lender offering term loans.
Lines of Credit
If you want flexible access to cash now and in the future, consider a business line of credit, which allows you to borrow, repay, and borrow more, up to your limit. Rapid Finance is a lender offering lines of credit.
Equipment Financing
Equipment financing is a loan to purchase equipment. The equipment acts as collateral. Collateral lowers the risk for the lender, which often lowers the borrower’s costs. Flexibility Capital offers equipment loans.
Is a Revenue-Based Loan Right for Your Business?
Business loans based on revenues are suitable if your cash flow fluctuates, making a fixed monthly payment less than ideal. A revenue based loan could help you get the capital you need without committing to a payment that may be unaffordable some months. It's well worth spending time to research the best options for your business. Fill out a short form with BusinessLoans.com and get offers from multiple lenders to compare.
