Definition of Revenue-Based Financing (RBF)
Revenue-Based Financing (RBF) is a funding model in which a company receives capital from an investor or lender in exchange for a percentage of its future revenue until a predetermined repayment amount is reached. This repayment amount typically includes the original principal plus a fixed multiple, such as 1.3x or 1.5x.
How Revenue-Based Financing Works
Instead of fixed monthly payments, RBF repayments fluctuate with the company’s revenue. When revenue is high, payments increase; when revenue is low, payments decrease. RBF agreements usually define two key parameters: a revenue share percentage (for example, 5% of monthly revenue) and a repayment cap (such as 1.5x the funded amount). Payments continue until the cap is fully repaid.
Revenue-Based Financing Explained for a General Audience
For a general audience, RBF works like receiving money upfront and paying it back as a slice of your sales over time. For example, a business might receive $100,000 and agree to pay back 5% of monthly revenue until $150,000 has been repaid. If sales grow quickly, the funding is repaid faster; if sales slow down, payments shrink, giving the business more flexibility during tougher periods.
Why Companies Use Revenue-Based Financing
RBF is considered non-dilutive because no equity is given up, and it does not require collateral like many traditional loans. It is often attractive to companies with predictable or recurring revenue, such as SaaS businesses, that want flexible repayment terms aligned with performance rather than fixed debt obligations.
Key Characteristics of RBF
RBF typically has no fixed interest rate or strict maturity date. The effective cost of capital depends on how long it takes to reach the repayment cap. Investors focus heavily on revenue stability, growth rates, margins, and churn to assess whether the business can repay the funding within a reasonable timeframe, often targeting three to five years.
Advantages and Tradeoffs of RBF
The main advantage of RBF is flexibility: payments adjust to revenue, reducing pressure during slower periods. However, if a company grows very quickly, it may repay the full cap sooner, resulting in a higher effective cost of capital. Additionally, because payments are tied to overall revenue, RBF can strain cash flow for low-margin businesses.
Revenue-Based Financing in SaaS
RBF is particularly popular among SaaS companies with steady monthly recurring revenue. It allows founders to fund growth, extend runway, or avoid immediate equity dilution. Many fintech providers offer RBF specifically tailored to SaaS metrics such as MRR, ARR, churn, and gross margins.
Revenue-Based Financing in Ratio’s Context
In Ratio’s materials, RBF is positioned as a traditional alternative to their financing model. In standard RBF, companies pay a percentage of total revenue each month regardless of whether specific customers have paid. Ratio’s approach differs by tying repayment to specific contracts, meaning payments occur only when the underlying customer pays. This makes financing more aligned with actual cash inflows rather than broad revenue performance.
How Ratio Differs from Traditional RBF
Traditional RBF often begins repayment immediately and may limit funding amounts relative to ARR. Ratio’s model can allow no payments until customer payments are received and may unlock a higher percentage of revenue by focusing on individual contracts rather than overall revenue streams. This can result in faster access to capital and potentially more favorable economics for certain business models.
Why Revenue-Based Financing Matters in a Glossary Context
Including RBF in a glossary helps explain one of the most common non-dilutive financing options for SaaS and subscription-based businesses. It provides important context for comparing financing alternatives and understanding how different models impact cash flow, risk, and growth.
Summary
Revenue-Based Financing is a flexible, non-dilutive funding method repaid through a percentage of future revenue until a fixed multiple is reached. It aligns repayments with business performance and is widely used by SaaS companies with recurring revenue. While it offers flexibility, it can be costly if growth accelerates quickly. Ratio positions its solution as an evolution of RBF by tying repayment to actual customer payments and improving alignment between cash inflows and financing outflows.
