Revenue-based lending

Revenue-based lending is used by a variety of businesses. But it can be particularly helpful for early stage businesses whose founders wish to avoid both diluting their stakes by issuing equity, and borrowing – relatively expensively – from venture debt providers or banks that provide growth debt.

In revenue-based lending model, a principal amount is advanced, unsecured, with no conventional maturity date. Instead, the lender advancing the funds receives regular repayments in an amount equal to a share of the borrower’s revenue. Interest is not charged, but a fee is added to the principal and likewise repaid from the borrower’s revenue.

If revenue declines, the borrower will make a proportionately smaller repayment to the lender and the loan will take longer to be paid off. However, if revenue increases, the loan will be repaid more quickly.

Technology and data

This type of lending relies on technology and the availability of data. The loan agreement will be made according to various metrics and the borrower’s financial information.

Typically, the lender will also expect to have a live feed from the borrower’s bank accounts, integrated with data sources such as e-commerce engines and advertising platforms to enable ongoing real time analysis. Repayments will be taken automatically, sometimes direct from the payment processor.