Revenue-based financing is typically structured with a multi-year repayment term in which the company pays a fixed percentage (usually 1% to 3%) of the revenues generated each month to their investor. To retire a revenue-based financing investment, a company typically makes these monthly payments until a pre-defined return multiple, internal rate of return, or date is reached, at which point the repayment obligation terminates. Unlike some other approaches to growth financing, revenue-based financing solutions typically don’t have any other fees, warrants, or hidden costs involved. Because payments are tied directly to revenues, the investment is very transparent; companies get a clear and accurate picture of their total cost of capital up front.

Traditional debt or loan structures can play an important role in supporting a company’s working capital needs, but they are often misaligned with the longer-term time horizons required to grow a business over many years. In addition to requiring personal guarantees, traditional debt generally involves fixed payment requirements and rigid financial covenants that are often incompatible with the contours of most growth-focused companies’ trajectories. In contrast, revenue-based financing solutions offer greater flexibility, more patience and a repayment framework tied to revenues. Moreover, you’re generally not required to maintain strict financial ratios, adhere to pre-set financial parameters, or pay facility fees on undrawn capital. As a business, you have significantly more agility.

Revenue-based financing is a way that firms can raise capital by pledging a percentage of future ongoing revenues in exchange for money invested. A portion of revenues will be paid to investors at a pre-established percentage until a certain multiple of the original investment has been repaid.

Revenue-based financing is often considered a hybrid of equity and debt financing, which makes it particularly popular with startups, technology companies, and SaaS (software as a service) businesses.