Revenue-Based Funding

Another new approach to funding business is Revenue-Based Funding. The idea is that instead of the risk being attached to the capital growth of the investment, the lender takes a risk on the revenue, by charging a percentage of the top line.

My first business made use of this back in 1982. We just happened to start at a very low ebb of the British economy (the worst time since the Great Crash) and the bank we chose to work with introduced a short-lived experiment to increase small business lending in a dull market. We were actually the benficiaries, since our sales came in below forecast over the loan period. It could of course, have gone the other way, but we would have had the money to cover it.

A US company called RevenueLoan now offers a Revenue-Based Funding product, but on relatively large amounts for startups.  As they say, “Revenue Based Financing (RBF) is a hybrid financing method that fills a need in the growth capital market for companies with approximately $1 to $10 million in revenue and a proven plan for growth.

Instead of requiring a business to pay a fixed amount and over a fixed amount of time (i.e. think of your typical bank loan), an RBF investment receives a fixed percentage of gross revenues, up to some negotiated “cap” (anywhere from 1.25x for a short term, on up, depending on the needs of the company, and the timeframe and risk factors).”

Their criteria are

  • Revenue run rate of $1 M or more
  • Gross margins of 50% or higher
  • Solid plan for use of funds with near-term return (“money machine”)
  • Can use $100k to $500k in funding immediately.

Revenue-Based Funding has advantages and disadvantages for the young venture, as it does for investors, but prima facie, it’s appealing to both.


Thanks to Thomas Thurston of Growth Science International for the picture of relative risk and reward for investors of various kinds of finance and the companion one below, seeing the alternatives from the entrepreneur’s perspective.

Another Revenue-Based Funding business is Next Step Capital Partners, based in Austin, Texas. The company was created to help small businesses with exciting opportunities for growth. By bringing a previously underutilized and innovative investment structure, partners Patrick Drew and Dan Keelan help companies across the state of Texas take their business to the next level.

Their approach means that repayment of the investment amount, plus an agreed-to return, is sourced solely from your company’s topline revenue. Payments are never fixed. As sales and revenue increase, the investment is paid off more quickly. If sales are lower than initially forecasted, your payments to us are reduced in kind.

A Boston-based fund, Arctaris provides capital to private and publicly held expansion stage companies seeking $1-5 million, or up to $50 million through syndication. They use both subordinated debt (ranking after other debts, should a company fall into receivership or be closed) and a royalty security in which an investment is made in exchange for a percentage of a company’s revenue for a predefined length of time.