Revenue based financing is a way for a business to get money from investors. In this method, investors give money to the business. In return, the business pays a small part of its future sales to the investors until a set amount is reached. Usually, this set amount is about three to five times what the investor first gave.
What Is Revenue Based Financing?
Revenue based financing, sometimes called royalty-based financing, lets a business raise money by promising a share of its sales. The business pays the investors a fixed part of its revenue every month. These payments continue until the total amount paid is three to five times the original investment.
“I like revenue based financing because it makes paying back easier when sales are good or slow when sales drop,” said one Reddit user.
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How Does Revenue Based Financing Work?
When a business uses revenue based financing, it must pay a portion of its sales to the investor. The amount paid depends on how well the business is doing:
- If the business sells more, the payment is higher.
- If the business sells less, the payment is lower.
This method is different from debt financing. In debt financing, a business pays a fixed interest on a loan. With revenue based financing, there is no fixed interest. Also, the investor does not own any part of the business like in equity financing.
Key Takeaways
- Simple Promise: The business promises a set share of its sales until the investor gets back three to five times the money they gave.
- No Fixed Interest: Payments change with the business’s sales. If sales go down, payments go down.
- Not Ownership: Investors do not get a share of the business. They only get a part of the revenue.
- A Mix of Ideas: It is a mix between debt and equity financing.
- Extra Costs: Sometimes, it can cost more than a regular loan because investors become like business partners.
Revenue Based Financing and Revenue Bonds
Revenue based financing is a lot like how revenue bonds work. Many cities use revenue bonds to build things like toll roads. The tolls from the road pay back the bond. In the same way, the business pays back the investor with its revenue.
This method is popular with small and mid-sized businesses that might not get money from regular loans. It is also used by some companies in the Software-as-a-Service (SaaS) area, where venture capitalists are finding creative ways to invest.
The Bottom Line
Revenue based financing is a simple way for businesses to get money by sharing a part of their sales with investors. It adjusts with the company’s performance and does not give away ownership. Many find it a smart choice, especially when traditional loans are hard to get.
“Revenue based financing gives companies a flexible way to grow without losing control,” another Reddit user said.