What are revenue-based business loans?

Afshan Qureshi
Afshan Qureshi
Content Marketing Manager
Posted on
May 19, 2022
min read
What are revenue-based business loans?

If your business has a predictable revenue stream, you may be a good candidate for a revenue-based business loan. This type of loan is especially useful for SaaS businesses with subscription-based revenue models.

If your business has a predictable revenue stream, you may be a good candidate for a revenue-based business loan. This type of financing is designed for businesses that have contracts with customers that generate regular and predictable revenue streams. 

Revenue-based business loans can be used to finance a wide variety of business needs, including startup funding, growth, working capital, and debt consolidation. But how do you know if a revenue-based business loan is right for you? And how do you qualify for a revenue-based business loan?

In this blog post, we’ll answer those questions and discuss the basics of revenue-based business loans.

What is a revenue-based business loan

A revenue-based business loan is a line of credit backed by recurring revenues from current customers or future contracts. Revenue-based business loans work similarly to working capital loans.

This type of financing allows startups to finance their next stage of growth without having to worry about producing profit. It’s like receiving a start-up line of credit that you don’t have to put up collateral for—but gives you the flexibility that most other financing options lack.

Let’s take software as a service (SaaS) companies for an example: these businesses have regular monthly bill payments from their customers. They generate repeated revenue through subscriptions and long-term contracts, giving them certainty in terms of how much revenue they can expect to receive at the end of each month.

This makes SaaS companies a great fit for revenue-based business loans – it prevents them from waiting for customers to make future payments, which is a common issue for service providers.

They know the revenue the business will bring in. So a revenue-based business loan can keep them from waiting on payments from customers.

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How to get a revenue-based business loan

Many financing institutions offer a revenue-based business loan with flexible terms. The terms vary, but they're usually based on the needs of your business. 

When applying for a revenue-based business loan, the lender will ask you about the average invoice cycle of your customers. Here’s a better look at what you can expect from the process: 

  • You’ll start by completing a short application to verify that there is recurring revenue in place. Then, your lender will request documentation such as cash-flow statements, bank statements, and tax returns.
  • The more guarantees your company shows with its offerings and customer loyalty, the easier it becomes for an institution to find out how much money it can lend and what interest rates should apply. If this level of predictability isn't present, then the lender has less certainty that you will be able to repay them on time—meaning higher interest rates or even denial of your application.
  • If approved for a revenue-based business loan, the provider can provide you with up to seven times your company’s recurring monthly revenue issued as a line of credit that you can draw down up to your available funding limit (called “revolving invoices”). So, if your recurring revenue is $60,000, then revolving invoices/lines of credit range between $40,000-$180,000.

Partners also offer revenue-based business loans for both short-term (working capital) and long-term (fixed assets).

How revenue-based business loans are changing startup funding

Revenue-based business loans offer businesses quick access to funds without having to wait for them on a pay-as-you-use basis. This method of financing works well for businesses that need access to capital, but whose cash flow isn't enough to be considered a revolving line of credit.

It also allows you to take advantage of opportunities when they arise without borrowing against your future profits. This type of financing is usually easy to qualify for if you have a business with annual recurring revenue (ARR).

The key factor here is consistency– having reliable customers paying consistently allows lending partners to secure a revenue-based business loan for your business. With this type of financing, lenders look at two main factors – the monthly payment the customer makes and how long that payment lasts. Terms tend to range from 36 months to 60 months.

Growing your business with a revenue-based business loan

In order to take advantage of the many benefits that a revenue-based business loan has to offer, you need a consistent source of income from customers who pay on a recurring basis. If you have this kind of cash flow, a revenue-based business loan may be a great growth funding option for your business. It’s also an excellent alternative to traditional options like working capital and inventory financing because it enables you to grow much faster.

A solution like Capchase can provide you with the upfront cash flow you need to fund your growth. Our non-dilutive dynamic funding options will allow you to maintain full control over your businesses. You'll get working capital without giving up any equity.

You can learn more about Capchase revenue financing at Capchase.com/grow.