RBF can be structured in many different ways. The most common structure is a term loan. Typically, the full amount is not advanced up front. The drawdown can occur over multiple years so that interest expense is not incurred until the funds are needed. Payments (which include principal and interest) are based on a fixed percentage of revenue or cash receipts from the prior month or quarter.
The structure is flexible; generally, payments are made until one of the following milestones occurs:
After the milestone is reached, the loan obligation is retired and no further payments are due.
Revenue-based funding is non-dilutive or minimally dilutive so entrepreneurs or management can keep a much larger percentage of ownership. In addition, lenders do not require board seats or other direct involvement in the governance or operations of the company.
Banks are subject to significant regulatory constraints. Therefore, revenue-based financing firms can often provide larger loan amounts and require fewer restrictive covenants than banks. The trade-off is that revenue loans are more expensive than traditional debt.
RBF is often confused with MRR-based loans. RBF is a loan in which repayment is based on monthly revenue. MRR-based loans are lines of credit in which the amount available for borrowing is based on monthly revenue.
Depending on the structure, RBF may be classified as debt or equity. In the U. S., it usually has a stated maturity date in order to comply with IRS requirements and ensure that interest expense is deductible.
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