A Revenue-Based Finance (RBF) investment provides capital to a business by selling an ongoing percentage of a company’s future revenues to the investor. In other words, an investor will invest through a revenue-based loan, which is unlike a traditional bank loan where each interest rate is the same monthly. Instead, the payment in a revenue-based loan is based on the revenue made by the company. Therefore, if your company makes zero dollars that month, you owe zero dollars back on the loan, making the payment solely reliant on the performance of the company. Revenue-based financing essentially takes a fixed cost and turns it into a variable cost. This style of funding does not require ownership dilution and is mainly used for companies who have inconsistent cash flows.
The obvious benefit is that the monthly payment corresponds to the revenue of the company. This enables the company to avoid defaulting on their loan. This funding is found typically in seasonal companies and risk adverse entrepreneurs.
The detriment is the same as the benefit, with high revenue comes high loan extraction. This style of funding makes it difficult for a company to receive high profits on an extremely good year as a large percentage will go to paying off the loan.