When to use revenue-based financing instead of VC and how to structure the deal

I remember the first time a VC pitch felt like the only way forward. We had rapid top-line growth, aspirations to scale internationally, and a roadmap that looked great on a slide. But as we dug deeper into the options, revenue-based financing (RBF) began to look like a smarter, more flexible path for that stage of the business. Over the years I’ve helped founders weigh these choices, and I want to share when I recommend RBF over venture capital—and how to structure those deals so they actually work for both the company and the investor.

When RBF makes more sense than VC

Revenue-based financing should be on your radar if your business has predictable revenues, healthy margins, and you want to avoid dilution. Here are the concrete situations where I usually recommend RBF:

• You have recurring or predictable revenue. SaaS businesses, subscription services, and companies with steady inbound sales are ideal. Predictability reduces risk for financiers who are paid a percentage of revenue.
• You want to retain control. If maintaining ownership and decision-making matters more than accelerated hypergrowth, RBF keeps equity in founders' hands.
• Your growth is capital-efficient. If additional capital will directly drive revenue (e.g., hiring salespeople, expanding channels) and you can convert spend into predictable returns, RBF aligns incentives.
• You don’t want to negotiate valuation now. Market conditions or early revenue volatility can make valuation difficult. RBF removes that immediate valuation debate.
• You need a shorter-term financing bridge. RBF is often used as a bridge between seed and a priced round, or to extend runway until a larger financing event.
• Your margins are sufficient to absorb revenue share. You must be able to pay the monthly/weekly revenue percentage without jeopardizing operations.
• You’re not scaling to a massive exit dependent on rapid market share capture. If your long-term plan is steady profitable growth or strategic acquisition, RBF can be ideal. If your path requires enormous capital to capture a winner-takes-all market, VC may still be best.

When VC remains the right choice

There are times when VC is the right tool. If your business needs huge capital infusions to build infrastructure, outspend competitors, or pursue a rapid user acquisition strategy that will burn cash for years, VC’s patience for negative margins and its network effects can be invaluable. Also, if you want the guidance and connections that come with experienced venture partners, that non-financial value matters.

Key metrics investors look for in RBF candidates

When I evaluate whether RBF will fit a company, I focus on a handful of metrics. If you can’t show these, RBF becomes risky or expensive:

• Monthly Recurring Revenue (MRR) or consistent monthly revenue with growth trends
• Gross margin — higher is better (ideally >50% for SaaS, but depends on sector)
• Customer acquisition cost (CAC) vs. lifetime value (LTV) — positive unit economics are essential
• Churn rate — low churn means predictable payments
• Revenue seasonality — stable across months is preferred

How revenue-based financing deals are typically structured

RBF deals can vary widely, but the elements you’ll see in most term sheets include:

• Total financing amount. The cash delivered to the company.
• Revenue share percentage. A fixed % of top-line revenue paid until repayment cap is reached.
• Repayment cap (multiple). Usually expressed as a multiple of the financed amount (e.g., 1.3–3x).
• Payment frequency. Weekly or monthly deductions aligned to revenue cadence.
• Minimum/maximum payment floors. Protects both parties in low or peak months.
• Term length/maximum repayment period. The maximum time over which the investor will be paid; if not reached, some deals allow conversion to equity or other remedies.
• Covenants and reporting requirements. Financial reporting, revenue verification, and sometimes reserve accounts.
• Equity kicker or warrants (optional). Some RBF investors request small warrants or a nominal equity slice to enhance upside.

Practical example: a simple RBF term sheet

That structure gives the investor upside through the repayment cap while keeping the company’s equity intact. Note how the minimum payment protects investor downside in slow months, and the maximum term prevents indefinite payments.

How to calculate the revenue share percentage and cap

In practice, investors model expected repayments using your revenue projections. They estimate a target internal rate of return (IRR) and set the cap accordingly. A simple way for founders to think about it:

• Start with the amount you need and your current monthly revenue.
• Choose a repayment horizon you can tolerate (e.g., 18–36 months).
• Revenue share = (Target repayment per month) / (Projected average monthly revenue).
• Repayment cap = Financed amount × chosen multiple (based on perceived risk).

For example, if you need $200k, expect monthly revenue of $50k, and want to repay in ~24 months, a 5% revenue share yields $2,500/month, or $60k/year, making repayment lengthy unless you pick a multiple that matches the investor’s required return. That’s why realistic revenue growth assumptions are critical.

Negotiation tips from experience

• Don’t sign away upside without getting fair value. If an investor asks for large warrants or large equity in addition to high caps, reconsider.
• Limit reporting burden. Frequent audits and invasive covenants can be disruptive. Aim for balance.
• Cap the payment percentage during low-revenue months. A floor/ceiling helps you manage cashflow volatility.
• Negotiate a maximum term and a cure period. If you temporarily miss payments, a structured cure avoids default triggers.
• Compare multiple offers. Different RBF providers (Lighter Capital, Clearbanc/Angellist historically) and independent funds have different tastes—shop around.

Common pitfalls to avoid

I’ve seen founders accept RBF with such high repayment caps that the effective cost of capital exceeded what a priced equity round would have been. Other mistakes include underestimating seasonality—leading to crushing payments in peak months—or accepting overly restrictive covenants that hinder growth. Always model worst-case scenarios for revenue before signing.

When to combine RBF and VC

Sometimes the best path is hybrid. You can take a small RBF tranche to prove a channel or finance inventory, then raise a priced round at a higher valuation. Alternatively, VC firms sometimes accept RBF bridges between rounds. If you pursue this, disclose RBF to potential VCs early; transparency avoids surprises in later diligence.

Choosing between revenue-based financing and venture capital isn’t about good or bad—it's about fit. RBF can be a powerful tool for founders who value control, predictable payback, and capital efficiency. Structure the deal thoughtfully, and it can give you runway without the dilution and governance changes that come with equity rounds.