Looking for the best way to fund your business? Here's a quick breakdown of how revenue-based funding (RBF) and bank loans differ, so you can decide which works for you:
- Repayment Flexibility: RBF adjusts payments based on your sales (2%-12% of revenue), while bank loans require fixed monthly payments regardless of your income.
- Approval Speed: RBF can provide funds in days, while bank loans take weeks or longer.
- Requirements: RBF focuses on your sales history, needing no collateral or credit score. Bank loans require a 700+ credit score, collateral, and detailed financial documents.
- Cost: RBF uses a flat fee (1.2x–2.5x the borrowed amount), while bank loans charge interest (6%-15% APR).
- Best For: RBF is ideal for businesses with fluctuating revenue or seasonal sales. Bank loans suit businesses with steady income and long-term investment needs.
Quick Comparison
| Feature | Revenue-Based Funding | Bank Loans |
|---|---|---|
| Repayment Structure | % of revenue (2%-12%) | Fixed monthly payments |
| Approval Time | Days | Weeks |
| Requirements | Sales history | Credit score, collateral |
| Cost | Flat fee (1.2x–2.5x) | Interest (6%-15% APR) |
| Flexibility | High, adjusts with revenue | Low, fixed payments |
| Best For | Seasonal, fluctuating sales | Stable, predictable income |
Bottom line: If your business has variable revenue and needs fast, flexible funding, RBF may be the way to go. For larger, long-term investments with predictable income, a bank loan might be better.
How Each Funding Method Works
Revenue-Based Funding: Payments Based on Sales
Revenue-based funding offers a repayment model directly tied to your business's revenue. Here's how it works: you receive funding and agree to repay a fixed percentage of your gross revenue - typically between 2% and 12% - until the total repayment (including fees) is complete. For example, if you secure $50,000 in funding with a 6% revenue share, you’ll pay 6% of your daily or monthly sales. If your monthly sales hit $20,000, your payment would be $1,200. But if sales dip to $8,000 the next month, your payment automatically reduces to $480.
What makes this model appealing is its flexibility. The total repayment generally ranges from 3 to 5 times the original funding amount, but there’s no set repayment timeline. That means you can pay it off faster during strong sales periods or take longer during slower ones. This flexibility is especially helpful for eCommerce businesses, where revenue often fluctuates seasonally. Unlike traditional loans, revenue-based funding adjusts to your business performance, so you’re not stuck with fixed payments during lean months.
Bank Loans: Fixed Payment Schedules and Interest Rates
Bank loans, on the other hand, come with fixed terms and obligations. You receive a lump sum upfront and repay it through consistent monthly payments over a specified period - usually 1 to 7 years. These loans have pre-determined interest rates, so your payment remains the same regardless of whether your monthly revenue is $5,000 or $50,000.
The approval process for a bank loan is more involved. It typically includes checking your qualifications, comparing loan options, submitting an application, reviewing the terms, and finally receiving the funds. To qualify, you’ll likely need a strong business plan, a good personal credit score, and possibly collateral or a personal guarantee. The process can take weeks, making bank loans less suitable for businesses needing quick access to funds. Banks also evaluate applications using the 5 C’s of Credit: Credit History, Capacity, Collateral, Capital, and Conditions. For newer eCommerce businesses, meeting these criteria can be a challenge.
To better understand the differences, the table below breaks down the key features of both funding methods.
Comparison Table: How Each Method Works
| Feature | Revenue-Based Funding | Bank Loans |
|---|---|---|
| Repayment Structure | Percentage of gross revenue (2-12%) | Fixed monthly payments |
| Payment Flexibility | Adjusts with sales performance | Same payment regardless of revenue |
| Repayment Term | No fixed term | 1-7 years typically |
| Total Cost | 3-5x original amount | Principal + interest |
| Approval Time | A couple of days | Several weeks |
| Primary Requirement | Revenue history | Credit score and collateral |
| Cash Flow Impact | Minimal during slow periods | Constant monthly commitment |
The core distinction between these two funding options lies in how they address the ups and downs of running a business. As business expert Chris Chocola once said:
"The fact is that one of the earliest lessons I learned in business was that balance sheets and income statements are fiction; cash flow is reality".
Revenue-based funding aligns with this mindset, offering a repayment model that adapts to your actual cash flow. Bank loans, however, stick to fixed obligations, regardless of how your business is performing.
Qualification Requirements
Revenue-Based Funding: Sales History and Platform Connection
Revenue-based funding (RBF) providers focus on your business's revenue performance rather than your credit score or collateral. Typically, businesses need to show at least $3,000 in monthly sales to qualify, though this threshold can vary depending on the provider's risk tolerance.
The process is straightforward. RBF providers directly connect to your eCommerce platform - whether you use Amazon, Shopify, BigCommerce, WooCommerce, Squarespace, Walmart Marketplace, or TikTok Shop - to review your sales history and forecast future revenue. This integration gives them access to real-time sales data, eliminating the need for outdated financial statements or self-reported figures.
Unlike traditional lenders, RBF providers place little emphasis on credit scores. This makes the funding option appealing to newer businesses or those with limited credit histories. Many non-bank lenders offering RBF don't even require a minimum FICO score. The key question shifts from "Are you creditworthy?" to "Does your business consistently generate revenue?"
Funding amounts typically range from one-third of annual revenue to four to seven times your monthly recurring revenue. For instance, if your business brings in $15,000 per month, you could qualify for funding between $60,000 and $105,000. This model aligns funding with your business's actual performance rather than traditional credit benchmarks.
Traditional bank loans, on the other hand, rely on more conventional evaluation metrics.
Bank Loans: Credit Scores and Collateral Requirements
When it comes to securing a traditional bank loan, the focus is on credit scores and collateral. Banks and credit unions usually require a FICO score of 700 or higher. As Joseph Camberato, CEO and Founder of National Business Capital, explains:
"Banks don't like to take risks. They prefer to work with well-established companies in industries they're familiar with, while non-bank lenders are a bit more risk-tolerant".
The application process for bank loans is more intensive, requiring years of financial statements, tax returns, detailed business plans, and personal guarantees. Banks also look for a strong credit history with consistent on-time payments and evidence of steady income or cash flow to support loan repayments.
Collateral is another critical requirement for bank loans. Banks often prefer tangible assets - such as property or equipment - that can secure the loan. For eCommerce businesses, this can be a major obstacle since many online merchants lack significant physical assets. Banks also tend to favor businesses that fit within their predefined categories of "safe" borrowers, making the application process even more restrictive.
Approval timelines further highlight the differences between RBF and bank loans. While RBF providers can make decisions in days, bank loans often take several weeks to process due to their detailed underwriting procedures. These evaluations cover everything from your debt-to-income ratio to your business's long-term sustainability.
Comparison Table: Qualification Requirements
| Requirement | Revenue-Based Funding | Bank Loans |
|---|---|---|
| Minimum Credit Score | No minimum FICO requirement | 700+ FICO required |
| Time in Business | 6+ months | 2+ years |
| Annual Revenue | $36,000+ ($3,000/month) | $500,000+ |
| Collateral | Not required | Often required |
| Financial Documentation | Platform integration for sales data | Years of financial statements, tax returns |
| Personal Guarantee | Not required | Usually required |
| Business Plan | Not required | Detailed plan required |
| Approval Timeline | Days | Several weeks |
| Primary Focus | Current and projected revenue | Credit history and collateral |
As Camberato points out:
"Alternative financing underwriting criteria are also more reasonable than banks' loan decision criteria. Many don't require collateral, which allows them to process applications faster".
This difference in approach makes revenue-based funding a better fit for eCommerce businesses with strong sales but limited credit histories or physical assets. By focusing on real-time business performance rather than traditional credit metrics, RBF aligns with the way modern online businesses operate and scale.
Cost Comparison and Cash Flow Impact
Cost Structures: Fees vs. Interest Rates
Revenue-based financing operates on a flat fee model, typically ranging from 1.2x to 2.5x the borrowed amount. For example, borrowing $100,000 with a 1.5x multiple means you'll repay $150,000. This approach often results in an effective cost of 20% to 40%, as it combines a factor rate with a percentage of your monthly revenue.
In contrast, bank loans use fixed annual percentage rates (APRs), generally falling between 6% and 15%. The total cost depends on both the interest rate and the repayment period.
The key difference lies in how repayment is structured. Revenue-based financing provides upfront clarity on the total repayment amount, with a flexible timeline tied to your sales performance. On the other hand, bank loans have fixed schedules with consistent monthly payments.
Now, let's see how these structures influence cash flow.
Cash Flow Impact: Variable vs. Fixed Payments
Revenue-based financing offers flexibility by adjusting payments based on your business’s monthly revenue. A fixed percentage is deducted until the agreed repayment amount is met. This makes it particularly appealing for businesses like eCommerce, where sales often fluctuate with the seasons. During slower months, payments decrease, easing cash flow pressure.
Bank loans, however, come with fixed monthly payments, regardless of your revenue. While this predictability can simplify budgeting, it can also create challenges during periods of low sales. The fixed nature of payments means less flexibility, though it provides clarity for financial planning.
As David Ure, Director of Corporate Financing at BDC, puts it:
"Fixing lets me know exactly what my margins are going to be and lets me forecast out exactly my profitability".
Comparison Table: Financial Impact
| Factor | Revenue-Based Financing | Bank Loans |
|---|---|---|
| Cost Structure | Flat fee (1.2x to 2.5x multiple) | Fixed APR (6% to 15%) |
| Rate Range | 20% to 40% | 6% to 15% |
| Payment Amount | Variable (% of monthly revenue) | Fixed monthly payment |
| Payment Flexibility | Adjusts with sales performance | No flexibility |
| Seasonal Adaptability | High – lower payments in slow months | Low – fixed payments throughout |
| Cash Flow Predictability | Variable monthly outflows | Predictable monthly outflows |
| Total Cost Transparency | Known upfront (fixed multiple) | Dependent on repayment timeline |
| Best For | Seasonal/fluctuating revenue | Stable, predictable revenue |
If your business experiences seasonal sales or fluctuating revenues, revenue-based financing can offer the flexibility you need. For companies with steady and predictable income, bank loans provide a more consistent repayment structure. Additionally, revenue-based funding can grow alongside your business, as credit limits often increase with rising revenues.
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When to Use Each Funding Option
When to Choose Revenue-Based Funding
Revenue-based funding is a great choice for eCommerce businesses with fluctuating sales or those needing quick access to capital without jumping through extensive approval hoops. It’s especially helpful if your business doesn't meet the requirements for traditional loans, such as having a long profitability track record, sufficient collateral, or an established credit history. This type of funding is often used to finance essentials like marketing campaigns or inventory purchases.
"Revenue based financing is often a far more compelling proposition for Founders than venture capital or business loans...Because, primarily, Founders get to keep full ownership of their business rather than giving up equity - as is the case with venture capital - and there is no risk of default as there is with a loan."
– Michele Romanow, president and co-founder of Clearco
When to Choose a Bank Loan
Bank loans are a better fit for larger, long-term investments that promise steady returns. Think of things like buying major equipment, expanding warehouses, or hiring permanent staff. If your business has a solid credit score and steady cash flow, you’re more likely to qualify for lower interest rates. Plus, the fixed payment schedules of bank loans make it easier to plan your budget. Successfully managing a bank loan can also improve your business credit, opening doors to better financing options in the future. These distinctions highlight how understanding your funding options can shape your growth strategy.
Case Study: Growing with Revenue-Based Funding
Here’s an example that shows how revenue-based funding can help businesses thrive despite seasonal ups and downs. For instance, while 64.4% of eCommerce companies rely on personal or family resources to get started, only 16.5% initially secure bank loans. This significant gap underscores the importance of alternative financing. A 2015 survey revealed that 71% of small eCommerce businesses have turned to alternative funding to navigate seasonal sales fluctuations and seize growth opportunities. This approach has become a lifeline for many in the industry.
Choosing the Right Funding for Your Business
Key Points to Remember
When deciding between revenue-based funding and bank loans, it often comes down to a trade-off between flexibility and predictability. Revenue-based financing adjusts repayments based on your sales, offering relief during slower months by easing cash flow pressures. On the other hand, bank loans come with fixed payment schedules, which can simplify budgeting but might become a burden when sales dip.
One major advantage of revenue-based funding is speed - funds can be available within 24 hours. In contrast, bank loans often take weeks or even months to process, which can be a challenge when cash flow is tight.
Your eligibility also depends on different factors. Revenue-based funding looks at your sales performance and platform metrics rather than traditional credit scores or collateral. Meanwhile, bank loans typically require strong credit, extensive financial documentation, and, in many cases, personal guarantees or assets as security.
Cost is another consideration. While bank loans usually carry lower interest rates, revenue-based funding adjusts its costs based on your business's performance, offering more flexibility.
Your business model plays a crucial role in determining the best option. For eCommerce businesses with seasonal sales or fluctuating revenue, revenue-based funding's adaptable repayment terms can be a lifesaver. Businesses with consistent, predictable income, however, might prefer the stability of a traditional bank loan. Platforms like Onramp Funds are designed to cater specifically to the unique needs of eCommerce businesses, offering tailored solutions.
How Onramp Funds Supports eCommerce Growth
Onramp Funds takes these differences into account, offering a revenue-based financing solution tailored exclusively for eCommerce businesses. The platform supports sellers on platforms like Amazon, Shopify, BigCommerce, WooCommerce, Squarespace, Walmart Marketplace, and TikTok Shop. Businesses with at least $3,000 in monthly sales can access funding within 24 hours - without giving up equity or providing personal guarantees.
"Onramp offered the perfect solution with revenue-based financing to secure the capital we needed to invest in inventory and pay it back at a reasonable time frame once we made sales. The process was quick, easy, and the support was great." - Jeremy, Founder and Owner of Kindfolk Yoga
One standout feature of Onramp Funds is its automated payment system, which adjusts repayments based on your sales. This ensures that businesses aren’t burdened with unmanageable payments during slower periods. With an "Excellent" rating from 196 reviews, customers often highlight the platform's straightforward process and responsive support team.
"Onramp's process is very straightforward and easy to navigate. I had funds in my account within a day of final approval." - Adam B., The Full Spectrum Company
Onramp Funds reports that businesses see a 0% revenue growth within 180 days of receiving funding, underscoring the impact of their flexible financing solutions on scaling eCommerce operations. Their transparent fee structure, which ranges from 2–8%, includes no hidden charges, giving businesses confidence in planning their repayment strategy.
Revenue-Based Financing: What Is It, and How Does It Work?
FAQs
How does revenue-based funding handle seasonal sales fluctuations compared to traditional bank loans?
Revenue-based funding offers a flexible repayment structure that adjusts according to your business's revenue. When sales are booming, payments rise; during slower periods, they shrink. This approach allows eCommerce businesses to manage cash flow more effectively without the burden of fixed monthly payments. On the other hand, traditional bank loans demand fixed payments no matter how your sales are performing, which can be tough to handle during off-peak seasons.
What factors determine if you qualify for revenue-based funding or a traditional bank loan?
Qualifying for revenue-based funding usually requires a steady stream of income. Most providers expect businesses to have been operating for at least six months and to meet a specific minimum monthly revenue. This type of funding works well for businesses with consistent sales but limited assets or a short credit history.
In contrast, traditional bank loans come with stricter requirements. Applicants typically need a strong credit score, a solid credit history, proof of steady income, and a low debt-to-income ratio. Additionally, banks often require collateral - like property or equipment - to secure the loan.
The appeal of revenue-based funding lies in its flexibility. Repayments are tied directly to your sales, making it an excellent choice for eCommerce businesses aiming to grow without dealing with the rigid conditions of traditional loans.
When is revenue-based funding a better choice than a bank loan for a business?
Revenue-based funding (RBF) can be a smart choice for businesses with fluctuating sales, like eCommerce companies. Since repayments are tied to a percentage of your revenue, you’ll pay less during slower sales periods, making it easier to manage cash flow. This flexibility is a big advantage compared to traditional bank loans, which come with fixed monthly payments that can be tough to handle during less profitable months.
Another perk of RBF is that it works well for businesses without collateral or a strong credit history. Unlike bank loans, it doesn’t require personal guarantees or traditional assets. This makes it a great option for startups or fast-growing companies that need quick, equity-free capital for scaling, purchasing inventory, or boosting marketing efforts. By linking repayments to your sales performance, RBF offers a financing approach that’s more in tune with the ups and downs of growing a business.
