Revenue-based financing evaluates and approves business applications solely on monthly gross revenues. This offers numerous advantages, namely that it’s much easier for businesses to secure funding because they just need to meet the minimum revenue threshold set by the provider they’re applying with.
We can contrast revenue-based financing with traditional debt financing, such as bank loans, which evaluate a wide range of factors, including credit scores, time in business, collateral, tax returns, business plans, and profit margins. With all these requirements, only about 18% of businesses that apply get approved for bank loans.
That said, the offer you choose is likely the single most important decision you’ll make when applying for revenue-based financing. We’ve spoken to countless businesses that selected bad offers without really understanding the terms and language, and got stuck in expensive, borderline predatory financing.
To help businesses secure rates and terms that are in their best interests, we created this guide to applying for revenue-based financing, with a focus on evaluating, comparing, and choosing lender offers. You can skip ahead to that section here.
Submit 4 months of bank statements and we’ll email you several revenue-based financing offers that you qualify for, with funding available the same day you apply.
How Does Revenue-Based Financing Work?
With revenue-based financing, the lender provides a lump-sum upfront underwritten based on your business’s monthly revenue, which you can use for any expenses, projects, or opportunities.
Revenue-based financing differs from bank loans in that it uses factor rates instead of interest rates. A factor rate is a decimal that represents the total amount you must repay. For example, if you borrow $100,000 at a factor rate of 1.1, you’ll need to repay $110,000.
Step 1: Evaluate Whether Revenue-based Financing Is Best for Your Needs Using These 3 Factors
Before you apply, consider whether revenue-based financing is the right solution for your situation. Revenue-based financing works best in the following scenarios:
- You can’t qualify for bank loans: As we mentioned above, banks have rigorous eligibility requirements that make it difficult for most businesses to qualify. With revenue-based financing providers like Redline Capital, the main requirement is $30,000 in monthly revenue, so most businesses can qualify.
- You need funds fast: Traditional banks take between 60 and 90 days to fund loans because they must review and underwrite extensive documentation (tax returns, balance sheets, profit and loss statements). Revenue-based financing can fund within 24 to 48 hours because the only paperwork needed is a few months of bank statements reflecting your revenue. This reduces the time spent evaluating and underwriting your application.
- You need larger loan amounts: Revenue-based financing providers can typically extend financing around 200% of your monthly revenue. In contrast, banks limit loans to 50% due to their conservative, risk-averse lending practices.
Step 2: Apply with Multiple Revenue-based Financing Providers
A significant advantage of revenue-based financing’s lightweight paperwork is that you can quickly and easily apply with multiple providers to compare offers.
Comparing offers from several revenue-based financing providers is necessary to secure the best possible factor rates, terms, and conditions since they can vary widely between providers.
For instance, here’s what you can expect when applying for revenue-based financing with Redline Capital.
- Complete a short application with details like your monthly revenue, time in business, industry, and desired funding amount, and submit four months of business bank statements showing your business’s revenue.
- We review your bank statements and run a soft credit check. Note that we don’t automatically disqualify you for having bad credit; however, strong credit lets you qualify for lower rates and larger business financing amounts.
- Within hours, we send you multiple revenue-based financing offers outlining the amounts you qualify for, total repayment amount, factor rates, repayment terms, and payment schedules.
- Review all offers carefully and select the one that best fits your business needs.
- Once you accept a financing agreement, funds are deposited in your business bank account immediately. This entire application and approval process occurs on the same day you apply.
Step 3: Choose the Right Offer
One of the costliest mistakes we see businesses make is unknowingly choosing bad offers, as it leaves them stuck in expensive financing arrangements.
With that in mind, we’ve outlined some guidelines and best practices to help you evaluate financing offers.
How Much Do You Need to Repay?
The most important thing to consider in a revenue-based financing offer is the factor rate, which is the total business financing amount versus the amount you must repay. With everything else being equal, we recommend choosing the offer with the lowest factor rate.
When you apply with Redline Capital, you can typically secure lower factor rates compared to other providers.
That’s because we’re one of the few revenue-based financing brokers who have decade-long relationships with the best business lenders, including OnDeck, Rapid Finance, Headway Capital, and more.
We’ve formed these lender relationships by delivering hundreds of millions of dollars in high-quality applications to them, helping grow their business. In exchange, they give our applications discounted rates unavailable to individual applicants.
Still, we always recommend applying with other revenue-based financing providers as well, so you can compare a broader range of offers. We say this confidently because businesses that shop around often come back to us due to our low factor rates.
How Long is the Repayment Period?
Consider the amount of time you have to repay the owed amount.
This is almost equally as important as factor rates because many unethical lenders will charge low factor rates to trick you into accepting their offer; however, the repayment term is very short, which puts a lot of pressure on your business to repay the financing amount.
As a result, we recommend choosing revenue-based financing offers with longer terms because they break down the owed amount into smaller installments, putting less pressure on your business.
Are There Any Collateral Requirements?
We recommend avoiding offers that require you to pledge business or personal assets (e.g., bank accounts, real estate, equipment) as collateral because if you can’t repay, the lender can claim and liquidate those assets, which is often needed to run your business.
Choose revenue-based financing offers that are unsecured because they reduce your borrowing risk. At Redline Capital, our financing offers don’t require collateral.
What is the Provider’s Reputation and Track Record of Ethics?
A big problem in the revenue-based financing industry — and alternative lending in general — is predatory lenders who pressure borrowers to accept their offers by emailing and calling them nonstop, 24/7.
Some lenders may even create a false sense of exclusivity by saying the offer will expire at the end of the day to get you to make a quick, uncalculated decision. It’s usually these aggressive lenders who also send the worst, most expensive offers.
We recommend researching each provider’s reputation by reading online reviews and checking their approach to customer service.
Choose providers who give you time to review offers, encourage you to shop around, and won’t pressure you to accept immediately. At Redline Capital, we never pressure businesses into accepting. We email the offers you qualify for and leave it to you to decide.
Step 4: Repay the Financing Amount
Once you accept an offer and receive funding, you’ll begin making regular payments based on a percentage of your business’s revenue.
Apply for Revenue-based Financing with Redline Capital
If you’d like to see what financing offers you qualify for with Redline Capital, submit four months of bank statements here and we’ll get back to you within an hour or two.
Revenue-based Financing Alternatives
Traditional Bank Loans
Traditional bank loans remain the most well-known financing option for businesses. Banks like Chase, Bank of America, and Wells Fargo offer term loans and lines of credit with competitive interest rates. The main benefits of bank loans include:
- Lower interest rates: Bank loans offer the lowest cost of capital available. If you qualify, you’ll pay significantly less than alternative financing options over the life of the loan.
- Longer repayment terms: Most bank loans come with 2 to 5-year repayment schedules, resulting in lower monthly payments compared to short-term financing.
The downside of bank loans is that they have extremely strict qualification requirements. Banks typically require excellent credit scores (720+), extensive financial documentation (including profit and loss statements, tax returns, balance sheets, and personal guarantees), and, often, collateral. The average approval rate for small business bank loans is just 18%, meaning most businesses that apply will be rejected.
In addition, traditional types of financing typically take 60 to 90 days to process due to extensive underwriting requirements. This makes them impractical for businesses with urgent cash flow needs.
Compare this with revenue-based financing. At Redline Capital, you only need $30,000 in monthly revenue, one year in business, and four months of bank statements. We can approve and fund your application the same day, with no personal guarantees or collateral required.
Read more: Top 6 Accounts Receivable Financing Companies
Equity Financing
Equity financing involves selling a portion of your business to investors in exchange for capital. This can include angel investors, venture capital firms, private equity, or crowdfunding platforms.
The main benefit of equity financing is that you have no debt obligations. Unlike loans, equity financing doesn’t require monthly payments or interest charges. You receive capital without adding debt to your balance sheet or having to pledge personal or business assets.
In addition, many investors bring valuable business experience, industry connections, and strategic guidance that can help grow your business.
The main disadvantage of equity financing is that you give up a percentage of your business and, potentially, decision-making.
Raising equity capital can also take months and involves extensive due diligence, financial analysis, legal documentation, and negotiations.
Finally, equity financing may not be suitable for most small businesses. Equity investors typically focus on businesses with potential for rapid scaling and eventual exit strategies through acquisition or public offerings.
With revenue-based financing, you keep 100% ownership of your business while getting the capital you need within hours, not months. There’s no loss of control or complex legal structures, just straightforward funding based on your existing revenue.
Invoice Factoring
Invoice factoring is a funding option that involves selling your unpaid invoices to a third-party company for immediate cash. You typically receive 70% to 90% of the invoice value upfront, with the factoring company collecting payment directly from your customers.
Invoice factoring offers businesses fast access to cash. Instead of waiting 30, 60, or 90 days for customers to pay, you get cash immediately.
Approval is also based on customer creditworthiness. Factoring companies evaluate your customers’ ability to pay rather than your credit score or financial history. This makes it easier to qualify if you have poor credit or high business debt. Since you’re selling an asset (your invoices) rather than borrowing money, factoring doesn’t add debt to your balance sheet.
However, factoring companies handle collections directly with your customers, which can create awkward situations or damage relationships if they’re aggressive.
Additionally, invoice factoring only works for B2B businesses. If you’re paid at the point of sale or serve consumers directly, invoice factoring simply won’t work for your business model.
Compare this with revenue-based financing, which works for any business with consistent revenue, whether B2B or B2C. We never contact your customers, and you maintain complete control over all client relationships. Plus, funding through revenue-based financing is based on your total monthly revenue, not just outstanding invoices.
Frequently Asked Questions
How to Get Revenue-Based Financing?
To secure revenue-based financing, you’ll typically submit recent business bank statements to demonstrate consistent monthly revenue, complete a short application, and then review and compare the offers you receive from different providers. The process typically takes 24-48 hours from application to funding.
How Does Revenue-Based Financing Work?
Revenue-based financing works by providing a lump sum upfront in exchange for a percentage of your future revenue.
What Are the Requirements for Revenue-Based Funding?
Requirements vary by provider, but typically include: minimum monthly revenue (often $10,000 to $50,000), at least 6-12 months in business, a U.S. business location, and a few months of bank statements showing consistent deposits. Credit score requirements are usually more flexible than traditional loans.
Can I Use My EIN Number to Get a Loan?
Yes, revenue-based financing providers typically use your EIN (Employer Identification Number) to verify your business and may run business credit checks. However, they also consider personal credit history since small business owners are often personally involved in business operations.
How Much Funding Can a Startup Get with RBF?
Startups can typically secure revenue-based financing equal to 100-200% of their monthly revenue, provided they meet minimum revenue requirements and have been operating for at least 6 to 12 months. Very new startups without an established revenue history may need to consider alternative funding sources.
What Are the Benefits of Using Revenue-Based Financing for E-commerce Businesses?
E-commerce businesses benefit from revenue-based financing through quick access to inventory funding, flexible repayment that adjusts to seasonal sales patterns, no collateral requirements, and the ability to capitalize on bulk purchase discounts or marketing opportunities without depleting working capital.
Revenue-based financing offers a practical alternative to traditional bank loans for businesses that need quick access to capital and have consistent revenue streams. By understanding the application process and carefully comparing offers, businesses can secure funding that supports their growth while maintaining financial flexibility.