Revenue-based financing (RBF) has emerged as a powerful funding alternative for growth-stage businesses that aren't well-served by traditional financing options. As a business attorney who's helped numerous clients navigate alternative financing structures, I've created this generator to help you craft a solid foundation for your revenue-based financing arrangement.
Unlike equity financing that dilutes ownership or traditional debt that requires fixed monthly payments regardless of business performance, revenue-based financing aligns the interests of both entrepreneurs and investors by linking repayment directly to business success.
With RBF, you receive capital upfront and repay it by sharing a percentage of your monthly revenue until you've paid a predetermined multiple of the original investment. This creates natural flexibility: payments decrease when business slows and increase when business thrives.
The agreement generator above allows you to customize a comprehensive revenue-based financing agreement to fit your specific business needs. Here's how to make the most of it:
The first tab lets you specify both the company and investor details. Be precise with legal entity names and addresses, as these details are critical for enforceability. For companies, include the full legal name with entity type (e.g., "Acme Technologies, Inc., a Delaware Corporation"). For individual investors, using their full legal name is sufficient.
This section defines the core economic terms of your financing arrangement. The most important consideration is the return multiple, which determines the total amount to be repaid. For example, with a $100,000 investment and a 1.5x return multiple, the company would repay a total of $150,000 over time.
When specifying the investment purpose, be specific enough to provide clarity but not so narrow that it unnecessarily restricts the company's flexibility. "General working capital and business growth" is often appropriate, but for larger investments, investors may require more specific allocation of funds.
The return multiple you select has significant implications for the effective cost of capital. For example, a 1.5x multiple repaid over 18 months translates to an approximate annual rate of 33%, while the same multiple over 36 months equates to roughly 16.7% annually. Consider your projected revenue growth and repayment timeline carefully when negotiating this term.
The revenue percentage and minimum payment terms form the foundation of the repayment mechanism. A typical revenue share percentage ranges from 3-10%, with higher-risk businesses typically paying higher percentages. The minimum monthly payment serves as a floor to provide investors with payment predictability regardless of revenue fluctuations.
The revenue definition is critically important - it determines exactly what income streams are subject to the revenue share calculation. Be deliberate about what you include or exclude here, especially if your business has multiple revenue streams with different risk profiles or growth trajectories.
A comprehensive revenue definition typically includes: gross sales, service fees, subscription fees, licensing revenue, and any other income from normal business operations. Common exclusions might include: tax refunds, insurance proceeds, litigation settlements, proceeds from asset sales outside the ordinary course of business, and capital investments.
This section determines what security (if any) the investor will have for the financing. Unlike traditional bank loans that typically require comprehensive security interests, revenue-based financing often relies less heavily on collateral. For early-stage companies, investors may require personal guarantees from founders, while more established businesses might pledge specific assets or provide a blanket security interest.
The financial reporting and restrictive covenants balance investor protection with company operational flexibility. More frequent reporting (monthly vs. quarterly) increases transparency but also administrative burden on the company. Restrictive covenants preventing additional debt, major business changes, or large expenditures protect the investor but can constrain company decision-making.
These provisions define what happens if things don't go according to plan. The cure period gives the company time to fix compliance issues before facing serious consequences. Acceleration clauses give the investor the right to demand immediate repayment of the entire remaining balance upon default.
The early satisfaction discount period incentivizes early repayment by reducing the return multiple if the company can repay within a specified timeframe. This is particularly valuable if you anticipate a future equity round or profitability that would allow early repayment.
Revenue-based financing operates in a specific regulatory framework that varies by jurisdiction. While generally less regulated than equity offerings, these agreements may still trigger securities law considerations depending on structure and marketing. Most RBF deals are structured to qualify under Regulation D safe harbors from registration requirements.
Unlike equity investments, revenue-based financing payments are typically classified as tax-deductible business expenses for the company, similar to interest payments. For investors, the return above the principal amount is generally treated as ordinary income rather than capital gains. However, specific tax treatment depends on how the agreement is structured and applicable tax laws.
This generator creates a foundational agreement, but I always recommend having the final document reviewed by a qualified attorney familiar with your specific situation and jurisdiction. Tax treatment in particular should be confirmed with a tax professional.
The most successful revenue-based financing agreements achieve a balanced approach that protects investor capital while giving the company sufficient flexibility to grow. Key areas requiring careful calibration include:
Revenue Percentage: Setting this too high can strangle company cash flow, while setting it too low may create an excessively long repayment period that increases investor risk.
Minimum Payments: These provide investor predictability but can become burdensome during slow periods. Consider including provisions for temporary reduction of minimums during defined hardship periods.
Information Rights: Regular financial reporting builds trust but creates administrative overhead. Monthly reporting is typical during early stages, potentially transitioning to quarterly as the relationship matures.
Change of Control: Most RBF agreements include provisions addressing what happens in the event of acquisition. Options include acceleration of the remaining balance, maintenance of the revenue share with the acquirer, or prepayment at a discount.
Every business situation has unique complexities that may require customization beyond this generator. As a business attorney with extensive experience in alternative financing structures, I can help ensure your agreement protects your interests while remaining attractive to investors.
Schedule a ConsultationWhile similar in concept, these are distinct financial products. Revenue-based financing typically has lower effective interest rates, longer repayment terms, and more business-friendly terms than merchant cash advances. RBF is designed as growth capital for established businesses with consistent revenue, while merchant cash advances often target early-stage or struggling businesses with limited options, typically at much higher effective rates. Additionally, RBF usually includes more comprehensive legal documentation and investor protections than the relatively simplified merchant cash advance agreements.
Yes, and many companies do. Revenue-based financing can work as a bridge to equity financing or as a complementary funding source. However, it's important to ensure your RBF agreement doesn't contain provisions that would impede future equity raises. Pay particular attention to any change of control provisions, restrictions on additional financing, or security interests that might concern future equity investors. I typically recommend negotiating explicit provisions addressing how the RBF investment will be treated in a subsequent equity financing - whether it will be paid off from proceeds, converted to equity, or continue alongside the new investment.
Revenue-based financing works best for companies with established, predictable revenue streams and healthy gross margins. Software-as-a-Service (SaaS) companies are particularly well-suited due to their recurring revenue model and high margins, but I've helped structure successful RBF deals for professional services firms, consumer product companies, and various other business models. The key elements are: (1) consistent monthly revenue that can support the revenue share payments, (2) gross margins high enough to accommodate the revenue percentage without threatening profitability, and (3) a clear path to growth that will support increasing revenue share payments over time.
Failing to make minimum payments typically constitutes a default under the agreement, potentially triggering serious consequences like acceleration of the entire remaining balance. However, in practice, I've found that most sophisticated RBF investors prefer to work with companies through temporary cash flow challenges rather than forcing defaults. The most important thing is transparent communication - if you anticipate payment difficulties, engage with your investor early to explore options like temporary payment reductions, interest-only periods, or extended payment terms. The agreement can also include explicit provisions for "hardship adjustments" that modify payment terms during defined business downturns.
Dispute resolution provisions vary, but I generally recommend arbitration for these agreements due to its efficiency and confidentiality compared to court litigation. The most common disputes I've encountered involve disagreements over revenue calculations (especially when the definition includes complex exclusions) and alleged covenant violations. To minimize disputes, ensure your agreement includes clear procedures for revenue reporting, investor review rights, and a defined process for addressing disagreements before they escalate to formal dispute resolution. Consider including an objective third-party review mechanism for contested calculations, which can often resolve issues before they require arbitration or litigation.
Revenue-based financing represents an increasingly important funding option in the modern capital landscape, offering flexibility that traditional debt and equity often can't provide. By carefully structuring your agreement using the generator above and considering the legal principles I've outlined, you can create financing arrangements that align investor returns with company success - the hallmark of sustainable business relationships.