Revenue-Based Financing: How It Works and When to Use It

Revenue-based financing (RBF) is a form of business funding in which investors provide capital in exchange for a fixed percentage of the company’s ongoing gross revenue until a pre-agreed total amount is repaid. The market was valued at just $9.77B in 2025; it is expected to grow at a CAGR of 62.3% to $ 67.73 B. These high-growth expectations are directly tied to the rise of subscription-based businesses.

How does revenue-based financing work?

Revenue-based financing does not require companies to issue shares and hence does not dilute the ownership stakes of existing stakeholders. Another benefit is that, since the repayments are tied to the revenue, in business down cycles, the size of your periodic repayments will also fall.

Example of revenue-based financing

Suppose your company, Finteach, is an edtech company operating on a monthly subscription model. Currently, its annualized revenue stands at $20 million, and it needs $30 million to scale operations. This would position your company to double its revenue in 1 year and then experience 30% revenue growth in the year after.

Your company has the following three financing options.

Revenue-based financing	Equity	Debt
Monthly repayment = 30% of revenue Total repayments = $45 million	$30 million for 30% equity	Interest rate = 20% p.a. Tenure = 5 years

To calculate which financing option maximizes the returns for existing stakeholders, i.e., the founders, we will make the following assumptions:

• Forecast period = 5 years
  
• Discount rate = 10%
  
• The $30 million-investment bears fruit in 1 year
  
• Expected annual operating expenses (other than financing costs)
  
  • 2026 = $4 million
    
  • 2027-30 = $5 million
    

Based on this, we can make the following projections:

Particulars	2026	2027	2028	2029	2030
Discount factor	1.1	1.21	1.331	1.4641	1.61051
Revenue	$20,000,000	$40,000,000	$52,000,000	$52,000,000	$52,000,000
Operating expenses	$4,000,000	$5,000,000	$5,000,000	$5,000,000	$5,000,000
Revenue-based financing
Repayments	$6,000,000	$12,000,000	$15,600,000	$11,400,000	$0
Net cash flows	$10,000,000	$23,000,000	$31,400,000	$35,600,000	$47,000,000
Discounted cash flows	$9,090,909	$19,008,264	$23,591,285	$24,315,279	$29,183,302
Equity
Repayments	$0	$0	$0	$0	$0
Net cash flows	$16,000,000	$35,000,000	$47,000,000	$47,000,000	$47,000,000
Discounted cash flows	$14,545,455	$28,925,620	$35,311,796	$32,101,632	$29,183,302
Debt
Repayments	$9,537,798	$9,537,798	$9,537,798	$9,537,798	$9,537,798
Net cash flows	$6,462,202	$25,462,202	$37,462,202	$37,462,202	$37,462,202
Discounted cash flows	$5,874,729	$21,043,142	$28,145,907	$25,587,188	$23,261,080

Now, let’s compare the value of founders’ stakes in each scenario:

Particulars	Revenue-based financing	Equity	Debt
Total discounted cash flows	$105,189,039	$140,067,805	$103,912,046
Post-funding ownership percentage of founders	100%	70%	100%
Value of founders’ equity	$105,189,039	$98,047,463	$103,912,046

In our example, despite assuming stagnation of revenue growth 4th year onwards, the revenue-based financing route offers additional value of at least $1.28 million over other routes.

When should companies consider revenue-based financing?

The following conditions make it favorable for your company to consider revenue-based financing over traditional debt or equity alternatives:

Need for flexibility in repayments

If you were to modify a loan to create a revenue-based financing agreement, you would need to swap out the interest obligation for repayment flexibility and a principal amount multiple.

So, it stands to reason that the principal amount multiple introduced would outweigh the interest obligation. So, unless you really value the repayment flexibility, you shouldn’t choose this over traditional debt financing.

High interest rates

Central banks hike interest rates when they need to bring inflation under control, even at the cost of slowing down economic activity. Also your ability to generate revenue will be compromised as the economy itself will be slowing down. In such periods, choosing revenue-based financing over debt can provide some much-needed flexibility.

High cost of equity

If equity investors are expecting extremely high returns on investment, you will be forced to accept high dilution. In some cases, this disadvantage may outweigh any cash flow-related benefits of equity financing.

Since the market conditions were in favor of the incoming investors, they were able to secure 30% equity in a high-growth edtech startup. If Finteach had secured $30 million for 20% equity, the founders’ stake would have been the highest under equity financing at $112 million.

Sound fundamentals

From a lender’s perspective, revenue-based financing can be extremely unpredictable, and the only tool at their disposal to counter-balance this unpredictability is by increasing the principal amount multiple. But companies with stable revenue due to high geographical and product diversification, brand loyalty, and stable production, are in a position to negotiate lower principal multiples.

Revenue growth anticipated

If your company achieves high revenue growth, it can significantly reduce the repayment period under revenue-based financing. Not only does this free up cash for further expansion or creation of contingency reserves, but it also leads to more value creation in comparison to equity or debt financing.

Eqvista – Accurate Insights for Defensible Decisions!

Interest rates have an inverse relationship with the stock market as well as private equity returns. So,the cost of equity and debt often oscillates in opposite directions. When equity is expensive, debt is cheap and vice versa. When both are expensive, you can turn to revenue-based financing.

That doesn’t mean that revenue-based financing has no place in markets where either debt or equity is cheap. Its flexibility and non-dilutive nature make revenue-based financing an equity and debt alternative worth considering under any market conditions.

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