Revenue-Based Financing Part 1: An Intro to the Dominant Form of Online SMB Funding

“How much a dollar really cost? The question is detrimental, paralyzin’ my thoughts”

— Kendrick Lamar, How Much a Dollar Cost

Welcome to the first post in a multi-part series where we dive deep into revenue-based financing, the dominant way small and medium-sized businesses (SMBs) have been accessing working capital and growth capital online in the United States over the last 15 years. By the end of this series, you’ll be armed with critical insights that brokers and lenders don’t always want you to know—information that’s kept many business owners in the dark for too long.

Let’s start by understanding what revenue-based financing (RBF) really is and why it’s taken the small business financing world by storm.

What is Revenue-Based Financing?

Revenue-based financing is a way for companies to access capital based on their existing and future revenue streams. Companies like OnDeck Capital, BlueVine, and others have popularized this model, offering funding to businesses that generate steady sales but can’t meet the strict requirements of traditional banks.

Unlike traditional loans, where repayment is fixed, RBF is typically repaid as a percentage of your business’s future revenue. The key advantage here is flexibility—payments fluctuate with your sales, which can help preserve your cash flow during slower months. That flexibility is why RBF has become the go-to option for many businesses that are shut out of traditional financing.

Who is Revenue-Based Financing For?

RBF isn’t for everyone—but it’s proven invaluable for certain types of businesses. If you’re a small business owner generating sales but unable to access the capital you need from a bank, this type of financing might be for you. Here’s why:

• Lack of Size: If your business is too small for a traditional bank to care about, RBF can be a lifeline.

• Lack of Time in Business: Banks often want to see years of operating history. With RBF, as long as you have strong revenue, the time in business isn’t as much of a barrier.

• Lack of Sufficient Asset Coverage: No collateral? No problem. RBF is based on your future revenue, not the assets you can put up as security.

• Poor or Marginal Personal Credit: Personal credit isn’t the be-all and end-all for RBF—your business’s sales performance matters more.

• Unfavored Industry: If you’re in an industry that banks don’t like (like restaurants or retail), RBF providers are more likely to be flexible.

In short: RBF is for businesses that are making money but can’t get capital through traditional channels. Whether you’re too small, too new, have poor credit, or are in an “unattractive” industry, revenue-based financing could be your ticket to growth.

How is Revenue-Based Financing Structured?

RBF can be structured in one of two ways—either as a loan or as an advance. What’s the difference? It all comes down to how the repayment is set up.

• Loan Structure: This operates similarly to a traditional loan, where you borrow a fixed amount and repay a fixed amount every repayment period. Because you pay a fixed amount, a loan maturity date (i.e.e when the loan is expected to be paid off) is known upfront–a requirement for a financial product to be classified as a loan.

• Advance Structure: In this model, you sell a portion of your future revenue to the lender in exchange for upfront capital. The repayment here isn’t technically a loan, but an agreement to pay back a portion of your revenue until the obligation is met. The total repayment amount is still known upfront, but because repayments are based on a percentage of sales, and future sales cannot be predicted, a maturity date cannot be known upfront.

Confused? No worries, for a deeper dive into these structures, make sure to check out Part 2 and Part 3 of this series [links to be added].

General Parameters of Revenue-Based Financing

Now that you’ve got a basic understanding of RBF, let’s break down the general parameters you can expect when considering this type of financing:

• Funding Amounts: Typically ranges from $5,000 to $2,000,000, depending on your business’s sales and financial strength.

• Term Length: RBF terms can vary, but they generally range from 3 to 24 months. The length of the term will depend on your business’s revenue consistency and growth potential.

• Pricing (Rate Factor): Instead of interest rates, RBF uses rate factors to determine the cost of capital. A typical rate factor might range from 1.05 to 1.50. For example, if you borrow $100,000 with a 1.25 factor rate, you’ll repay $125,000 over the term of the financing. We’ll dig much deeper into how this pricing works in later parts of the series.

• Payment Frequency: Repayments can be made on a daily, weekly, biweekly, or monthly basis.

Other Takeaways

RBF’s are MUCH easier to qualify for than traditional bank loans
They are MUCH more expensive than traditional bank loans, even the best RBF deals are
They can close in a matter of days with a minimal amount of paperwork and back and forth–compared to often months long processes with the bank

Conclusion: Empower Yourself with Knowledge

The business owners who thrive in today’s economy are the ones armed with knowledge. By understanding the ins and outs of revenue-based financing, you’ll be in a much stronger position to negotiate better terms, secure capital without using a broker, and ultimately grow your business without unnecessary middlemen taking a cut.

And that’s where Diogenes comes in—our platform is here to give you the inside track on funding options, pulling back the curtain on secrets brokers have kept from you for years. Stay tuned for Part 2 and Part 3 of this series, where we’ll dive deeper into how RBF works and how you can get the best deal possible.

Revenue-Based Financing Part 1: An Intro to the Dominant Form of Online SMB Funding

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