Revenue-Based Financing Term Sheet: Guide for Understanding
Revenue Based Financing (RBF for short), sometimes called a Merchant Cash Advance, is a newer form of funding, especially in the eCommerce space where sellers are provided funding for essential business expenses based primarily on their current revenue.
When working out a deal with a lender, you’ll sometimes get a document outlining essential information like how much cash you’re being loaned, the amount you’re expected to pay each period, how much of a fee you’ll be paying, things like that.
This is sometimes called the Term Sheet.
However, like with anything in financing, things can get confusing quickly, especially when you’re not well versed in funding terms and vocabulary.
This post will review a Revenue-Based Financing Term Sheet, words you’ll commonly encounter, and other important things to know.
What is a Revenue-Based Financing Term Sheet?
A revenue-based financing term sheet is the blueprint for the funding you will receive from your lender that outlines all of the conditions and expectations of the loan, which will be officially drawn up after both parties agree to what’s on the term sheet.
The difference between a typical term sheet and one designed around revenue-based financing is a lot of the vocabulary used will be centered around a company’s top-line revenue, which will be the primary metric to outline the amount to be loaned, the minimum payment for each payback period, and length of time to pay off the loan.
On a revenue-based financing term sheet, you’ll see different terminology than on a traditional term sheet, and we’ll go over some of the standard terms you will come across.
What are Some Common Terms on a Revenue-Based Financing Term Sheet?
Some common terms you’ll encounter:
This is the amount of cash you will receive and subsequently have to pay back (with fees applied).
Can also be called “Funds Provided”, “Capital Amount”, or “Loan Amount”.
Can also be called the “Payoff Period” or “Repayment Schedule.”
This is the total amount of time estimated to pay off your loan.
The length of time for revenue-based financing can vary greatly depending on the type of repayment schedule you’re happy with, how high of a fee you’re comfortable with, and how much of the loan you can pay back each period.
With all that information gathered, you can see repayment schedules as fast as one month, lasting up to six months.
This can sometimes be called the “Remit Rate,” “Recoupment Rate,” or “Payment Rate.”
When you take on a revenue-based loan, your minimum payment isn’t pre-set and is broken into 12-24 equal monthly payments. Instead, it uses a percentage of your top-line sales.
So if your sales for a payment period from Amazon, for example, is $25,000, at a 25% remit rate, you will pay back $6,250 on your loan for that pay period (plus any fees).
Conversely, if sales are a bit lower next pay period, say $20,000, then you will pay $5,000 (plus fees) at that same rate.
Some revenue-based loans are based on the cash your platform pays you. Some are based on your sales numbers; it’s all relative and comes out to be similar in the amount paid, so look at the numbers and see if they make sense.
Just make sure that you read what the remittance rate is based on, some will base it on total revenue (your sales), or they’ll base it on the cash your platform pays out to you.
Any loan you sign up for must be paid back with some kind of fee attached.
Traditional loans usually calculate this amount with interest (typically APR with year+ loans).
With a revenue-based loan, fees will be based on either the amount loaned, a percentage of revenue, or a mixture of both.
Total Fees Paid
The most critical number to look at here is how much beyond the principal the loan will cost you, and that is typically presented as “Total Fees Paid.”
Early Payment Fee
Sometimes called “Prepayment Fee” or “Early Payoff Penalty.”
Revenue-based loans do not usually have an early payment option like a traditional loan. They are designed with the lender and the business owner to create an optimal payment plan that fits your business.
If you think you’ll be able to pay off your loan faster, renegotiate the terms with your lender before funds are disbursed to have a faster Collection Period to lower your Total Fees Paid.
Eligible Gross Sales
You might see this term regarding the repayment schedule or recoupment section.
This is the snapshot of revenue used to determine how much you will pay back your principal balance plus any fees.
Is a Term Sheet a contract?
A term sheet is not legally binding or a contract, and you are not obligated to do anything when you receive a term sheet.
A term sheet exists to outline the deal you’re working out with your lender, the amount you’ll be receiving, the fees applied to your loan, and the repayment schedule.
A term sheet exists to help YOU and help you make an informed decision for your business.
In summary, a term sheet lets you get the overall picture of your upcoming loan, how much it will cost, and how long it will take to repay it.
If you’re comparing offers from different lenders, make sure you understand all of these differences to get a deal you’re happy with.
Onramp is a revenue-based eCommerce lender. If you’re looking to grow your business through funding for product restocks, advertising, and new product development, sign up for Onramp, and you can get a funding offer and subsequent funds in your account in a few days.