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What is Revenue Financing?
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What is Revenue Financing?

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Revenue financing (also known as royalty-based financing) refers to the use of future anticipated revenue streams as collateral to obtain a loan or other form of financing.

Revenue financing is a way for businesses or organizations to secure funding for projects or operations without having to use traditional forms of collateral, such as assets or property since revenue-based financing investors view a predictable and consistent or recurring revenue stream as an “asset” on which to secure the loan. 

Lenders typically agree to provide capital to a business against a certain percentage of a company’s recurring gross revenue. Typically a pre-agreed percentage (e.g., 4%) of your monthly recurring revenue is accepted as payment, meaning payments are low in slow months and high in busier months. 

Many revenue-based finance lenders will also use a multiple (i.e., 1.6x payback) instead of interest rates to determine how much you will pay in return for the funding.

Pros & Cons of Revenue Financing

Pros

  • Allows businesses to access capital without having to use existing assets as collateral
  • Can be a good option for businesses that have strong and predictable or recurring revenue streams
  • Repayments scale with growth so are low at the beginning and increase as the business grows

Cons

  • May be more expensive than traditional forms of financing, due to the added risk for the lender
  • If business growth is faster than expected, the repayments can become burdensome and take significant working capital from the business
  • If the business does not generate the expected level of revenue, it may be unable to make loan payments, which could lead to default

Looking for non-dilutive capital?

TIMIA Capital works with B2B SaaS and software-enabled
companies between $2 – $20 million ARR.

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