For Subscribers

Revenue-Based Financing Offers a Flexible Route for Cash A loan that provides capital in exchange for a fixed percentage of gross monthly revenue is gaining new traction among startups. For some borrowers, it can be an attractive alternative to a traditional bank loan.

By Vanessa Richardson

Opinions expressed by Entrepreneur contributors are their own.

The Pay-as-you-go Loan
image credit: Shutterstock

Six years after founding YogaDownload, Jamie Kent was stuck. Her Denver-based company could pay its bills, but she needed cash to create new classes and attract customers. She was beyond using her credit card, and the bank loan terms she saw were Draconian.

"I only needed a small injection of money to get the ball rolling, without the fear of heavy payment terms," Kent says. An online search for "small-business financing" led her to revenue-based financing (RBF). "It seemed like a perfect way to cash-strap my company," she recalls.

RBF loans have been common for years in industries ranging from film production to drug development. Now with banks keeping their belts tight, the concept is gaining traction among startups.

Instead of requiring a fixed-interest payment every month, an RBF loan provides capital in exchange for a fixed percentage of gross monthly revenue. Thus, if the company has seasonal or hard-to-predict cash flow, the payments adjust accordingly.

"Our value proposition is that there's no equity dilution, no loss of control," says Andy Sack, founder of Lighter Capital in Seattle, which gave Kent her loan. While RBF interest rates are typically higher than those at a bank, a business doesn't have to put up collateral or give up an ownership stake (as it would with investors). The risk, as with any loan, is that delinquency means losing your business. "But compared to banks, we provide more capital to succeed," Sack says.

Average RBF loans range from $50,000 to $250,000, with annual interest rates between 18 and 20 percent and payment terms within three years. There are no background or credit checks.

After applying for an RBF through Lighter Capital last winter, Kent had money wired to her bank account within two weeks. While she won't disclose the loan amount or interest rate, Kent did say that each month she calculates 9 percent of her revenue and e-mails the paperwork to the firm, which debits that amount from her account. "I didn't borrow a lot, but it helped so much, giving me more flexibility in what I could do," she says.

Sack says he wants to finance businesses with revenue from $500,000 to $3 million, annual growth rates of at least 15 percent and margins of 50 percent or higher. This mainly means niche companies, such as those in specialty technology and light manufacturing. Businesses with low margins and major infrastructure needs, like restaurants or big factories,
are not likely candidates for RBF loans.

But interest in RBF is growing, even among Fortune 500 companies. "A company at any stage can benefit from this type of financing," Sack says. "The main thing holding it back is market education."

Want to be an Entrepreneur Leadership Network contributor? Apply now to join.

Side Hustle

How to Build Endless Passive Income With This Simple Online Hustle

Autopilot stores aren't just income streams. They are passports to freedom, flexibility and finally working and living on your own terms.

Side Hustle

This 29-Year-Old's Side Hustle Brought People 'to the Dark Green Side.' It Made $10,000 Within 2 Days and Sees 6 Figures a Month.

Nikki Seaman began work on her business when the pandemic led to grocery store shutdowns.

Business News

JPMorgan Is Now Valued More Than Its 3 Largest Competitors Combined: 'We're Quite Cautious to Just Declare Victory'

JPMorgan is worth more than Citigroup, Bank of America, and Wells Fargo all put together.

Business News

Here Are the 'Rules' If You Want to Be Rich, According to Barbara Corcoran

Real estate pioneer Barbara Corcoran says the most successful people she knows all have one thing in common.

Business Ideas

70 Small Business Ideas to Start in 2025

We put together a list of the best, most profitable small business ideas for entrepreneurs to pursue in 2025.

Marketing

How Yankees Star Anthony Volpe Turned a Recovery Drink Into a Business Opportunity

Yankees shortstop Anthony Volpe turned his personal recovery routine into a business venture by investing in and partnering with organic sports drink brand Recover 180. Volpe is taking a thoughtful approach to brand building as he begins expanding his impact beyond the baseball field.