Is revenue-based financing cheaper than raising equity?

The honest version of this comparison needs two scenarios, because the answer flips between them.

The arithmetic people show you

Illustrative only. Suppose you need 250,000. Option one is revenue-based financing at a cap of 1.30: total repayment 325,000, cost 75,000. Option two is selling 10% of the company at a 2,500,000 valuation.

If the business is worth 10,000,000 in four years, that 10% has cost you 1,000,000 of value against the 75,000 of cash the financing would have cost. On those numbers the financing is dramatically cheaper, and that is the slide everyone has seen.

The arithmetic people skip

Run the same two options, on the same illustrative figures, through the case where the plan does not work.

If the business is worth 1,000,000 in four years, the 10% cost you 100,000 of value — and you never had to write a cheque for it. The financing still cost 75,000, and it took that money out during the eighteen months when things were going badly. If revenue fell far enough to trip a minimum payment or an outside maturity date, it took more than that, on a schedule set by the contract rather than by the business.

Equity does not have to be repaid. That is not a minor asterisk. It is the entire difference in risk between the two instruments, and it is what the discount rate on equity is paying for.

The number missing from both slides

Neither version of the comparison above says what the financing costs per year, and a cap on its own cannot tell you.

Illustrative only — the same 250,000 at a 1.30 cap, repaid in level monthly amounts. Over eighteen months that is 18,055.56 a month and an annualised cost of about 35%. Over thirty-six months it is 9,027.78 a month and an annualised cost of about 18%. Identical 75,000 of cost; half the annual price.

Which one you get is determined by your revenue, not by the contract. That is the feature being sold — you repay faster when you earn more — and it is also what makes the headline cap uninformative. A cap is a total. It becomes a price only when you attach a duration to it, and the duration is the part nobody will commit to.

When the comparison is fair

When the money funds something with a payback you can measure and a cycle shorter than the repayment term. Inventory that turns in ninety days. A marketing spend with a known payback period and a stable return. A contract that has been signed and needs to be delivered. In those cases you are buying a bridge across a timing gap, the cost is a known dollar figure, and selling permanent ownership to solve a temporary problem is genuinely poor value.

When the comparison is dishonest

When the money funds losses. Financing an operating deficit converts a loss into a debt with a payment schedule, and the schedule does not care whether the deficit closed.

It is also dishonest when the pitch annualises the cost of a permanent claim, ignores dilution that only bites if the business succeeds, treats a personal guarantee or a validity guaranty as if it were free, or compares an eighteen-month cost with a forever cost as though the two numbers belong on the same axis.

The clauses that decide which case you are in

Four provisions turn a flexible instrument into a fixed one, and each is written for the funder's protection rather than yours:

Warrants, where attached, put a slice of the equity upside on top of all of it. That is not a hybrid worth calling cheap.

What to ask before the comparison means anything

• What is the cap, and does it change with time or performance?
• Is there a minimum monthly payment, and what is it in dollars?
• Is there an outside maturity date?
• What counts as revenue, and is the percentage taken from gross or net?
• Who guarantees what, and does the guarantee cover payment or only fraud and diversion?
• Are warrants or any other equity right attached?

Answer those six and you have a priced instrument that can be set against an equity round. Leave any of them open and you are comparing a slide to a slide.

The test worth applying

Write down what the money is for, what it produces, and by when. If the answer is a specific, dated cash inflow, price the financing against that timeline and the comparison to equity is close to irrelevant. If the answer is "runway", you are looking at risk capital, and risk capital priced as a fixed obligation is the most expensive money in the market — regardless of what the multiple says.