Revenue-based financing is a method of raising capital for a business. Investors provide money in exchange for a percentage of the enterprise’s ongoing gross revenues. In this type of investment, investors receive a regular share of the businesses’ income until a predetermined amount has been paid, which is usually three to five times the original amount invested.

This financing method is different from debt financing due to the absence of interest on an outstanding balance and fixed payments. Payments to an investor are directly proportional to the business’s income level. Thus, the payment to investors varies based on the business’s performance. If the sales drop in one month, the investor’s royalty payment will reduce and vice versa.

Revenue-based financing is considered a hybrid between debt financing and equity financing since the investor doesn’t have direct ownership in the business. In some ways, it is similar to accounts receivable-based financing, where a company uses its outstanding invoices or money owed by customers to receive financing.

Revenue-based financing is a way for businesses to raise capital and pledge a percentage of future ongoing revenues in exchange for the money invested. A portion of the revenues will be paid to investors at a pre-established percentage until a certain multiple of the original investment has been repaid. It is usually considered distinct from both debt and equity-based funding.

Revenue-based financing is similar to the cash flow structures common to revenue bonds, although they are separate forms of financing. Municipal projects issue revenue bonds to finance specific projects, such as infrastructure, instead of using general obligation (GO) bonds. These projects retire debt obligations with secured income generated by the project or asset, such as a toll-road, hence the name revenue bond.

At Resonate Business Services, we have lenders who offer Revenue Based Financing options.