Guide

Exits and alternatives

Revenue-based financing

An advance you repay as a cut of monthly revenue until you hit a cap, with no equity sold.

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Revenue-based financing (RBF) is an advance you repay as a percentage of monthly revenue until a cap is hit — often 1.3× to 2.0× the amount you took. Pure RBF does not sell shares. Many structures also skip a personal guarantee, though terms vary. You are selling a slice of future revenue, not ownership.

Concept

Cost of capital here is the extra dollars you repay above the advance. It is usually higher than bank debt and lower than equity if the alternative was selling a large stake. The comparison depends on growth and margins, not a single interest-rate headline.

The big idea

Think of a merchant cash advance on a shop's card receipts: the lender takes a cut of each day's sales until paid back. RBF is that idea with a stated multiple. The analogy breaks when revenue is lumpy — the cut still comes out, even in a bad month.

Fits when you have predictable revenue (often SaaS or e-commerce), you need working capital for inventory, marketing or hiring, and growth is solid but not venture-hyperbolic.

Fails when revenue is lumpy or falling, margins cannot absorb the share, or you needed equity-sized capital for a multi-year platform bet.

Trade-off

Choose RBF when dilution is costly and revenue can service the share. Choose equity when you need more capital than revenue can repay quickly, or when the investor's network is part of the product. Do not use RBF to fund a science project with no near-term revenue.

Walking through it

Take $500k of RBF. Repay 8% of monthly revenue until $750k is repaid (1.5×).

Cap to repay: $500k × 1.5 = $750k

If revenue stays $100k/month:
  payment  = 0.08 × $100k = $8k/month
  months   = $750k / $8k  ≈ 94 months

If revenue grows to $250k/month:
  payment  = 0.08 × $250k = $20k/month
  payoff   is much faster

Model the path, not one month. Growth shortens the loan; a stall stretches it and eats margin the whole way.

Common mistakes

  • Comparing RBF to a bank rate. The right comparison is equity you would have sold, plus whether the share still leaves a healthy margin.
  • Using RBF with lumpy revenue. A 8% cut of a dead month is still 8% of a small number — and the next good month pays more than you budgeted.
  • Treating the advance as equity-sized fuel. RBF cannot fund years of pre-revenue research. That is equity or grants.

Check yourself

You take $500k at 1.5× and 8% of revenue. Revenue is a flat $100k/month. About how long to repay?

About 94 months — $750k ÷ $8k per month.

When is equity cheaper than this RBF, even though it dilutes you?

When you need more capital than revenue can repay, or when the raise buys a network and a growth path that RBF cannot.

Key takeaways

  • RBF is repaid as a revenue share until a multiple, not as a sale of stock.
  • It fits predictable revenue and working-capital needs; it fails on lumpy or pre-revenue work.
  • Model the repayment path as revenue changes, not a single month.

Further learning

Back to the map of alternatives to venture capital.

Alternatives to venture capital

A map of bootstrap, RBF, grants, customer funding and debt — and how to pick the game you are playing.

Bootstrapping

Growing from revenue and savings instead of institutional equity, and what you keep and give up.

Burn, runway and default alive

Calculating burn and runway, the default-alive test, and how to extend runway.