Revenue-Based Financing vs. Equity — Which Is Better for a $2M ARR SaaS?

We're a B2B SaaS at $2M ARR, growing ~40% YoY. Profitable but want capital to accelerate growth. We've been approached by both a VC fund (offering $3M for 20% equity) and an RBF provider (offering $500K at 1.5x repayment cap, 8% of monthly revenue).

The VC deal feels expensive. The RBF is smaller but no dilution. Can we do RBF now and raise equity later at a higher valuation?

At $2M ARR growing 40%, your implied valuation should be $10M-$15M, so 20% for $3M is actually reasonable. But if you can grow to $4M ARR with the RBF capital, you'd raise the Series A at $20M-$25M pre-money and give up less equity.

The risk: RBF payments reduce your cash flow during repayment. At 8% of revenue, you're paying ~$13K/month initially.

Legal considerations for RBF:

• Review for personal guarantees (some RBF providers sneak them in)
• Check for anti-dilution provisions conflicting with future equity raises
• Ensure there's no equity conversion clause
• Watch for covenants restricting future equity raises

The RBF term sheet does have a "warrant coverage" clause — they want warrants for 1% of equity. Is that standard?

Warrant coverage on RBF is increasingly common but negotiable. 1% is on the low end (I've seen 2-5%). Push for warrants at current fair market value, not at a discount. And make sure they have an expiration date (5-7 years standard).

We did RBF at a similar stage ($1.8M ARR). Took $400K from Lighter Capital. Used it for 2 sales hires that generated $600K in new ARR. Raised Series A 8 months later at a much higher valuation. Would do it again.

One more thing: some VCs don't like seeing RBF on your cap table. It can signal that you couldn't raise "real" venture capital. Check with potential Series A investors before committing.

Update: Went with the RBF deal ($500K, 1.5x cap, negotiated warrants down to 0.5% at current FMV). Planning to use it for sales hires and revisit equity fundraising in Q3. Our attorney caught a personal guarantee clause that we got removed.