What is Revenue-Based Financing? Pros and Cons

If you’ve ever watched the show Shark Tank, you’ve seen businesses grapple with ceding equity or ownership in return for a capital investment. It’s a hard trade-off: After doing the hard work of building your business from the ground up, do you want to lose 25% of your equity to a venture capitalist (VC) or angel investor?

Revenue-based financing can be a way to avoid handing over equity, board seats, and long-term payouts. This type of financing is gaining popularity—the market size is forecast to rise from $6.4 billion in 2023 to $178.3 billion by 2033—and it could be what you need to take your company to the next level.

What is revenue-based financing?

Revenue-based financing (RBF) is when investors provide capital to your business in exchange for a fixed percentage of your regular monthly revenue. You might also hear it called revenue-based funding or royalty-based financing.

Unlike a small-business loan or other forms of traditional debt financing, you don’t have to make a fixed monthly payment, nor do you pay interest on the loan amount. You also don’t sign over a share of your ownership. Instead, your repayment fluctuates based on each month’s revenue.

Revenue-based financing is often a useful model for companies without a lot of assets they can use to secure loans, like small ecommerce businesses. They’re also particularly beneficial for projects that will help businesses increase revenue, and thus pay back the loan faster.

How does revenue-based financing work?

The funds in revenue-based financing typically come from investment firms or lending businesses. Under a revenue-based financing model, you and your investors decide on the funding amount as well as the repayment cap. A repayment cap is the total amount you’ll need to pay back, and typically ranges from 1.2 to three times the size of your loan. You multiply the repayment cap by your funding amount to get the total amount you need to repay.

Next, you and the lender must agree upon a remit rate, or what percentage of your monthly revenue you will put toward repayment each month. The range depends on the investor, but you might expect anywhere from 1% to 25% of your monthly revenue. You will keep making your monthly revenue-based payments until you pay off the total loan amount; there’s no set end date.

Let’s put it all together. Imagine you’re an ecommerce clothing store expanding your product line and seeking startup funding of $20,000. If you negotiate a repayment cap of 1.5, your total repayment amount would be $30,000. You agree to pay 5% of your monthly revenue share to the investor until you repay the total amount. If you consistently earn $50,000 in monthly revenue, it would take one year of monthly installment payments of $2,500 to complete your repayment amount.

Pros of revenue-based financing

• No equity for funders
• No large payments
• No personal guarantees
• Faster funding times

Revenue-based financing agreements have several advantages when compared to traditional equity financing or venture debt. These include:

No equity for funders

Unlike equity-based financing, with a revenue-based financing agreement, you don’t need to hand over any ownership to your funders. This lets you maintain full control of your business. You won’t be pushed in a certain direction by board members, and if your company makes it big, you’ll retain ownership until or unless you choose to sell.

No large payments

All repayment for a revenue-based finance loan is based on your monthly revenue. This means you’re not locked into large fixed payments you can’t afford if your revenue declines. If you have a bad sales month, you’ll still just pay the percentage your agreement dictates—you don’t have to drain your bank account. This is especially important for businesses with seasonal sales fluctuations.

No personal guarantees

For some small-business loans, you need to put personal assets on the line to secure funding. If your business fails, you could risk losing your personal belongings (such as your car or home). This isn’t true of revenue-based financing, so there’s less risk to your personal assets.

Faster funding timeline

The traditional VC funding process can take months or even years of pitching, bargaining, and collaboration. Many early-stage companies don’t have the time or the resources for raising capital and chasing their next funding round. It can be better for growing businesses to partner with RBF investors because they can typically get funded in weeks.

Cons of revenue-based financing

• Can be more expensive overall
• Requires revenue
• Smaller loan amounts
• Must make monthly payments

Revenue financing isn’t the right fit for all businesses. Here are a few reasons you may want to consider other strategies to obtain growth capital.

Can be more expensive overall

In many cases, revenue financing is more expensive overall, so it pays to do the math before committing. As of May 2025, the maximum allowable fixed interest rate for a US Small Business Administration 7(a) loan of $25,000 or less is 15.5%. That’s significant, but repayment caps for revenue financing can be even higher.

Let’s say you take out a revenue-based loan of $25,000 with a repayment cap of 1.6 for your ecommerce business. You would repay $40,000 in total (the initial $25,000 loan amount plus the equivalent of $15,000 in interest payments). On a traditional loan with a five-year term and a 15.5% interest rate, you would pay a total of $36,000 (depending on your monthly payment amount), of which just over $11,000 is interest. Revenue financing is popular for short-term loans needed to fuel growth. For long-term loans, debt financing may be a more cost-effective option.

Requires revenue

Because equity financing is based on your recurring revenue, you need to have a good track record to secure a loan. Early-stage companies or pre-revenue startups without a history of making money might have a harder time getting funding from RBF investors. Generally, investors will study a company's performance and make their offers based on your cash receipts. If you don’t have money now, it makes it hard to predict future revenue and thus receive revenue-based financing.

🌟No revenue but need funding? Learn how to get money to start a business.

Smaller loan amounts

Because funding is based on your monthly recurring revenue, revenue-based funding typically has lower maximum loan amounts than other types of funding. From the investor’s perspective, it’s risky to hand out large amounts of money if they’re not receiving guaranteed equity or other collateral in exchange. Often, they will base their funding amount on your current financial metrics rather than your business’s potential.

Must make monthly payments

Unlike equity financing, revenue-based financing requires you to make monthly payments no matter what. You can’t defer a month if cash is tight or you get hit with higher expenses than usual one month. As a business owner, you need to decide if you can handle these recurring payments while still making payroll, rent and other financial obligations, and without putting your company at risk.

*Shopify Capital loans must be paid in full within a maximum of 18 months, and two minimum payments apply within the first two month periods. The actual duration may be less than 18 months based on sales.