Revenue-Based Financing vs a Term Loan: Run the Real Numbers
A flat 1.3x factor sounds cheaper than 14% APR until you convert it. How to compare non-dilutive funding options on the only basis that matters — effective annual cost.
Revenue-based financing (RBF) sells speed and flexibility: capital in days, repayment as a percentage of monthly revenue, no fixed maturity, no board seat. Term debt sells predictability. They are priced in different units, which is exactly why comparisons go wrong.
Convert factors to annual cost
RBF is usually quoted as a factor: borrow 500,000 and repay 1.30x, or 650,000. That is 150,000 of cost. The annualised cost depends entirely on how fast you repay.
- Repaid over 24 months: roughly 27% effective annual cost.
- Repaid over 12 months: roughly 55%.
- Repaid over 6 months: north of 100%.
Faster growth means faster repayment, which means the capital becomes more expensive, not less. That inversion is the single most misunderstood property of the product.
Where each one fits
Revenue-based financing works when the use of funds has a short, measurable payback — inventory that turns in 90 days, a paid acquisition channel with a proven contribution margin, a bridge to a signed contract. You are renting money against a known return.
A term loan works when the asset outlives the loan: equipment, a fit-out, an acquisition, refinancing of expensive short-term debt. Fixed payments are easier to budget and cheaper per dollar.
Terms to read closely
- Minimum repayment floors that convert a "flexible" percentage into a fixed obligation in a bad month.
- Stacking restrictions that block you from raising any additional debt while the facility is outstanding.
- Blanket liens on all business assets, which can make a later bank facility impossible without a subordination agreement.
- Default triggers tied to revenue decline rather than missed payments.
A workable rule
Compute the effective annual cost at your realistic revenue case, then again at 30% above plan. If the higher-growth case makes the facility materially more expensive than a bank line you could plausibly qualify for in six months, the patient option is usually the cheaper one.
General information, not financial advice.
Fin Tomorrow publishes general information only. Nothing here is personalised financial, tax or legal advice.
