Revenue-Based Financing Part 4: How Your Small Business Is Underwritten

In this installment of our Revenue-Based Financing series, we’re diving into the underwriting process—the behind-the-scenes evaluation lenders use to decide whether to fund your business, how much to lend, and on what terms. Unlike banks, revenue-based financing providers have more flexible qualification standards but still rely on a structured review to minimize risk and ensure your business is a good fit for their products.

When underwriting your business, these lenders generally focus on six key areas:

Revenue: What’s your business bringing in, and how stable is that revenue?
Cash Flow: Do you have the cash flow to support regular repayments?
Personal Credit: How has your personal credit history impacted your financial reputation?
Time in Business: How established is your business?
Industry: Are you in an industry that lenders view as lower or higher risk?
Other Credit Risk Factors: Additional factors that help lenders assess the overall risk of lending to you.

Each lender’s perception of risk is unique. How much, how, or how little they weigh any of these factors will vary from lender to lender. Additionally, the broader macro environment—including the state of the economy, interest rate trends, and each lender’s specific appetite for certain industries—plays a role in shaping their criteria. While one lender might emphasize cash flow heavily, another may give personal credit or industry type more weight, especially during tighter economic periods or in industries that carry higher levels of risk.

In the sections below, we’ll break down each factor in detail, showing how it affects your funding options and what you can do to present your business in the best light. Armed with this knowledge, you’ll be better equipped to navigate the revenue-based financing landscape and find the right lender match.

Revenue

When it comes to assessing your business’s revenue, revenue-based financing providers take a streamlined approach. Unlike a traditional bank, they’re not interested in the detailed profit and loss statement, balance sheet, or cash flow statement your accountant would prepare. Instead, they rely on bank data or store data from your payment processor or platform (like Shopify or Stripe) to get a real-time view of your revenue and cash flow. This approach drastically reduces underwriting times compared to the slow, paperwork-heavy process of bank lending.

Here’s what they’re looking for in your revenue profile:

Revenue Stability: The big picture question they’re asking is, “Is your revenue stable, growing, or deteriorating?” Stable or growing revenue trends are positives, while lenders are wary of businesses showing a secular (long-term) revenue decline. It’s important to note that lenders are usually able to distinguish seasonal dips from a true downward trend. They’re more concerned with identifying businesses on a steady decline—those with year-over-year revenue drops that indicate a bigger issue than just one slow month.
Revenue Makeup: How is your revenue structured? Lenders look at the frequency and size of deposits to get a sense of your revenue predictability. For example, are you running a high number of smaller transactions—like a nail salon that gets daily credit card deposits—or do you receive fewer, larger payments over longer intervals, such as a general contractor being paid in installments by a developer? All things being equal, more frequent deposits mean more predictable revenue, which translates to greater security in the lender’s eyes. High-frequency, steady deposits can reassure a lender that your cash flow will be consistent enough to meet repayment obligations.

In short, revenue-based lenders assess the health of your revenue stream and how much they can rely on it by focusing on real-time financial data. This approach is quick, effective, and well-suited to the needs of small businesses that may lack traditional financial documentation. The stability and predictability of your revenue are crucial in shaping your offer and the terms you’ll receive.

Cash Flow

Revenue-based lenders aren’t going to sift through a traditional profit and loss statement, balance sheet, or formal cash flow statement to evaluate your business’s financial health. Instead, they’ll infer your cash flow status based on the bank and payment data you provide, drawing insights directly from your bank account activity. Here’s what they’re looking at:

Free Cash Flow: First, lenders want to know if you’re generating enough free cash flow to cover three critical areas: your business’s operating expenses, any existing debt obligations, and any additional debt service payments you’d incur if approved for their loan. In simple terms, they want to be sure you can pay them back without stretching your resources too thin.
Account Health: Lenders assess the health of your cash flow by looking at key indicators within your bank accounts:
- Average/Monthly Daily Balances: Are your daily balances consistently healthy across your accounts, or do they dip dangerously low? A business with stable or high average daily balances signals stronger cash flow stability, while thin balances can raise red flags.
- Overdrafts/NSFs: Frequent overdrafts, Non-Sufficient Funds (NSFs), or returned items indicate that your cash flow may be unstable. A pattern of these issues can significantly impact your chances of securing financing, as they suggest you may not have the reserves to cover additional debt.
- Credits vs. Debits: Over the long term, does the volume of your deposits (credits) exceed or align with the volume of your debits? If you consistently have more debits than credits, it’s a signal that your business could be cash flow negative, putting your ability to repay any additional loan at risk.
Changes Over Time: Lenders also look at how your cash flow pattern has evolved:
- Growing Deposits with Controlled Expenses: If your deposits are increasing—suggesting a boost in sales—and your debits (expenses) remain stable or increase at a slower rate, this points to a business that’s not only growing but also becoming more financially efficient.
- Growing Deposits with Proportionate or Higher Debits: On the other hand, if your deposits increase but your debits increase even more, it indicates that while sales may be growing, your costs are growing at a faster pace, which can reduce your available cash flow.

Revenue-based lenders rely on these indicators to gauge how well your business can manage additional debt. Healthy cash flow isn’t just about revenue—it’s about ensuring that what comes in sufficiently exceeds what goes out, providing a cushion that gives lenders confidence in your ability to repay.

Intermission: How Am I Providing This Data?

By now, you may be wondering exactly how these lenders get their hands on your financial data without asking for traditional financial statements. Most revenue-based financing providers use one of the following methods to gather the information they need:

Bank Statements (PDF Uploads): You may be asked to upload 3-12 months of your most recent bank statements in PDF format. This method provides a snapshot of your cash flow, balance trends, and transaction history directly from your bank.
Bank Connection Tools (Plaid, Finicity): Many lenders use integration tools like Plaid or Finicity that allow you to connect your bank account directly within their application process. This connection provides lenders with access to at least 90 days of transaction history, giving them a real-time view of your cash flow without the need for multiple document uploads. If a lender uses one of these tools, it’ll usually be embedded in their application flow.
Embedded Lenders: If you’re working with an embedded lender like Shopify Capital or Stripe Capital, the data they need may already be at their fingertips. Embedded lenders often have access to your sales data directly from their platforms, which gives them a clear picture of your revenue. In these cases, they might not even require access to your bank account or statements.
- Sales Data vs. Bank Data: Some embedded lenders don’t need to review your bank account because they already have access to your sales figures. They believe their control over the platform you use to run your business (e.g., payment processing, e-commerce, etc.) provides them with ample insight into your revenue and cash flow. This platform ownership also gives them leverage in case of a default, so they may feel secure in extending financing without a full cash flow review.

By using these methods, lenders can streamline the underwriting process, often leading to faster approvals and funding. This approach also reduces the documentation burden on you, letting the data flow directly from your bank or platform to the lender with minimal friction.

Personal Credit

Most revenue-based lenders will conduct a soft inquiry on your personal credit. This is good news: a soft inquiry means you can (and should) apply to a handful of direct lenders that fit your business needs (remember—DIRECTLY, not through a broker) to get them to compete for your business. With soft inquiries, you get multiple offers without impacting your personal credit score.

Some embedded lenders, however, skip the credit check entirely—especially if they already have access to your sales and cash flow data through their platform (e.g., Shopify Capital, Stripe Capital). Why are these lenders comfortable without a credit check? For two main reasons:

Expanding Their Market: They want to reach customers whose personal credit may be less-than-perfect. By bypassing the credit check, they make their funding accessible to a broader base of business owners.
Control Over Business Data: Their ownership of the software or payment streams you use provides them with enough insight and leverage over your business. For example, by controlling the payments flow, they can deduct repayments directly from your sales, reducing the risk to themselves.

What They’re Looking For

Your Credit Score: Each lender has a minimum FICO score they require, typically ranging from 550 to 650. The higher your score, the better your terms are likely to be. Higher scores generally translate to:
- Larger Approved Amounts
- Lower Cost of Capital (Better Rate)
- Longer Repayment Terms
Credit Utilization and Leverage: Some lenders look beyond your score to see how much personal debt you’re already managing (like mortgages, credit cards, student loans, and auto loans). They’ll consider your minimum payment obligations to get a sense of how leveraged you are personally. Low utilization and low debt leverage indicate that more of your business’s cash flow can go toward servicing the business’s obligations—making you a lower risk in the lender’s eyes.

Ultimately, personal credit serves as a risk indicator. A strong credit score and manageable personal debt tell lenders that you’re financially responsible, making them more comfortable extending favorable terms to your business.

Time in Business

The time in business requirement is pretty straightforward: most revenue-based lenders require your business to have at least 6-12 months of operating history and revenue generation. Note that this means actual operating history—not simply the date your business was registered.

The longer your business has been around, the lower the perceived risk. Established businesses have had time to build predictable revenue patterns, making them more reliable in the lender’s eyes. Time in business also provides lenders with an understanding of any seasonal ebbs and flows in your revenue. For example, if you run a snowboard and ski shop, lenders would expect to see sales spikes in winter. However, if you’ve only been in business for one season, your risk is considered higher compared to a similar business with a 5-10+ year history showing consistent seasonal patterns.

This requirement stems from a basic reality of business: most businesses fail within the first few years of operation. The longer you’ve been in business, the more confidence lenders have in your stability, making them more comfortable extending credit.

Industry

When it comes to assessing risk, industry plays a big role in how revenue-based lenders evaluate your business. Lenders generally favor businesses with predictable revenue patterns and a high volume of smaller deposits, viewing them as safer bets. Typical examples are “mom and pop” establishments, such as auto repair shops, nail salons, convenience stores, and franchises. These businesses operate on a steady flow of sales, making cash flow and repayment more predictable.

On the other hand, businesses with choppier revenue patterns are often considered riskier. Examples include industries like manufacturing, B2B distribution, IT services, and large-scale construction. These businesses may see fewer but larger deposits, which can fluctuate significantly depending on contracts or project-based income. For lenders relying on consistent repayment, this can represent a higher risk.

Similarly, industries with thin operating margins, such as trucking and logistics, tend to be perceived as higher risk. Many revenue-based lenders are wary of these sectors, and some will even avoid funding them entirely due to the razor-thin margins and unpredictable costs that come with the territory.

Impact of the Economic Environment

The economic climate also affects how industries are viewed. In a strong economy, sectors like hospitality and fine dining may be seen as stable, lower-risk options. However, during economic downturns, these industries may be viewed as higher-risk, given the likelihood of consumers cutting back on discretionary spending. Conversely, certain counter-cyclical industries (like dollar stores) can become more appealing in softer economies, as consumers shift spending from higher-cost options (e.g., luxury supermarkets like Whole Foods) to budget alternatives.

Ultimately, the industry your business operates in will influence the terms and availability of financing options, with revenue-based lenders generally leaning toward those with steadier cash flow and customer demand patterns.

Credit Risk Factors

Beyond personal credit, revenue-based lenders will often pull data related to your business credit and financial background to assess the creditworthiness of your business. Here’s what they typically look for:

Business Credit History: Lenders may review your business’s credit profile to see how well you’ve managed any credit extended by suppliers or other business debtors. A solid history of timely payments to suppliers reflects positively, indicating that your business has a track record of meeting its obligations.
Negative Marks: The presence of bankruptcies, judgments, or tax liens on your business credit report can be major red flags, depending on the lender’s policies. For some, a previous bankruptcy might make your business ineligible, while others may overlook it if there’s been a significant period of recovery since. Judgments and tax liens indicate unresolved debts, which can impact your eligibility and the terms you’re offered.
Policy Variability: Each lender’s approach to credit risk factors will differ. While one lender might be willing to extend credit to a business with a few minor past credit issues, another may have stricter standards, requiring a cleaner credit history. It’s important to understand that these policies can vary widely—some lenders are more flexible, while others require strong credit histories across the board.

Revenue-based lenders use business credit risk factors to gauge how well you’re managing your financial obligations and whether your business is positioned to reliably service additional debt. Although standards vary, a clean credit history and lack of negative marks can increase your chances of securing favorable terms.

Takeaways

Revenue-based lenders combine the factors we’ve discussed—revenue, cash flow, personal credit, time in business, industry, and other credit risk factors—to “score” or “bucket” your business. Businesses that score higher, or fall into a higher-quality bucket, will generally receive more favorable terms and larger funding amounts. On the other hand, businesses that score lower may face less favorable terms, reduced funding, or even be declined outright.

So, what does this mean for you? By leveraging BrokerFreeCapital and Diogenes, you’ll get a list of lenders that are the best match for your specific business profile, allowing you to avoid unnecessary middlemen and cut costs. Remember, one of the smartest steps you can take to secure the best terms is to sidestep brokers entirely.

Finally, if you check all the boxes above, have your financial documentation organized, and aren’t in immediate need of funding, consider pausing to explore traditional bank or SBA lending. These options may take longer—several weeks or even months—but they often come with lower costs and longer terms than revenue-based financing solutions.

Armed with this knowledge, you’re better positioned to secure the funding you need on the best terms possible.