Is revenue-based financing a loan?

Both structures exist under the same product name, and the marketing rarely distinguishes them.

The loan version

A promissory note, an obligation to repay, a fixed total cost, and a payment that varies with revenue. The variable payment is a convenience feature bolted onto a debt. You will usually see the words "borrower", "lender", "principal" and "promises to pay", plus a personal guarantee of the debt itself.

The purchase version

The business sells a share of future revenue at a discount. The paper says "sells, assigns and transfers", identifies a purchased amount and a specified percentage of receipts, and states that the funder is buying an asset rather than lending against one. There is usually a reconciliation clause, because contingent repayment is part of what makes it a purchase, and usually a validity guarantee rather than a guarantee of repayment.

How to tell in two minutes

Read the first paragraph of the agreement and the guaranty. Then look for three things: a fixed maturity date, a mandatory reconciliation mechanism, and language about what happens if the business simply stops generating revenue without any fault. A purchase-form contract that also has a hard maturity date and no working reconciliation is a loan wearing a costume, and courts have said as much when asked. The concept is recharacterization.

Reading the reconciliation clause properly

The reconciliation clause is where the purchase characterisation is either real or decorative, and the difference is visible in the verbs.

A contract that says purchase on page one and gives the funder sole discretion over reconciliation has a fixed payment obligation in substance. That pattern is what a court looks at when recharacterisation is argued, and it is also what decides what happens to you in a bad quarter — which matters whether or not anyone ever goes to court.

The same cash flows, a bad year, two outcomes

At $75,000 of monthly revenue the remittance is $6,000 and the balance clears in about 14.5 months. Revenue falls to $42,000 and, if the percentage is genuinely applied to actual receipts, the remittance falls to $3,360 and the duration stretches to about 25.9 months. The total stays at $87,000. You pay the same dollars over longer, which is exactly what buying a share of revenue is supposed to mean.

Run it instead as a fixed daily equivalent with no working reconciliation. The remittance stays at $6,000 against $42,000 of revenue — 14.3% of the top line rather than 8% — and the difference is funded out of your payables. The paperwork still says purchase. The economics are a fixed-payment loan.

The clause decided which of those you are in. The label did not.

Why it matters

The practical answer

For deciding whether you can afford it, the label changes nothing: compute total repayment against cash received and a realistic number of months. For deciding what happens if the year goes badly, the label changes a great deal, and it is the one thing you cannot work out from the pricing page.

What to ask for, in writing

1. Is the reconciliation right mandatory? Ask for the clause number and read it yourself.
2. What documents trigger it, and how many days does the funder have to respond?
3. Is the adjustment retrospective?
4. What is the specified percentage, and a percentage of what? Gross receipts, card settlements only, and bank deposits are three different denominators and they produce three different payments.
5. Is there a maturity date anywhere in the document? A genuine purchase of future revenue struggles to have one.
6. Which form of guaranty am I signing? Validity and performance guaranties look alike on the signature page and commit you to different things.
7. Is there a confession of judgment, and what is the governing law and venue?

Get the answers by clause reference rather than by email reassurance, and note which questions produced a citation and which produced a sentence about how it never comes up. That difference is usually the most informative part of the exchange.