How revenue-based financing repayment works, and why the payoff date moves

The remittance is a share of revenue, so the payment moves. The total repayment is set at signing, so the cost does not. Nobody at the closing table can tell you the exact date you will be finished, and that is a feature of the structure rather than an evasion.

The two numbers that define the deal

Everything else people talk about — the term, the payment, the annualised cost — is an output of those two inputs and your actual sales.

The arithmetic

Illustrative only — the figures below are invented to show the mechanics. They are not a quote, a range, or anything drawn from a funder's published pricing.

Suppose you take 100,000 with a cap multiple of 1.30 and a remittance of 7% of monthly revenue. Total repayment is 130,000. Cost is 30,000.

• Revenue of 80,000 a month means 5,600 remitted. 130,000 divided by 5,600 is about 23.2 months.
• Revenue of 120,000 a month means 8,400 remitted. About 15.5 months.
• Revenue of 200,000 a month means 14,000 remitted. About 9.3 months.

The cost is 30,000 in every case. The price of that cost is not the same in every case, because a price has a time dimension and a fixed dollar figure does not.

A rough way to see the difference: if repayment runs reasonably evenly, the average balance outstanding is around half the advance, so about 50,000 here. Thirty thousand of cost against 50,000 of average balance is 60% of the money actually in use. Spread over 15.5 months, that is roughly 46% a year. Spread over 23.2 months, roughly 31% a year. Both are approximations rather than an annual percentage rate, which has to be computed from real payment dates and amounts — the very thing nobody knows at signing.

Growing faster makes the same deal more expensive

That is the part worth sitting with. Under a fixed cap, repaying early does not save you anything. It compresses the same cost into fewer months, which raises the annualised rate. A term loan works the other way: pay it down and you stop paying interest.

Some agreements include an early-payoff discount, written as a lower cap if you finish inside a stated window. Most do not. If a salesperson mentions one, the question is whether it appears in the document, with the window and the reduced total spelled out. A discount described on a call is not a discount.

The floor under the floating payment

The float is not symmetric. Read for the clauses that put a bottom under the payment when revenue falls.

Reconciliation is the mechanism, if it is mandatory

When revenue falls, the reconciliation clause is what is supposed to lower the payment. Read it for three things: whether the adjustment is mandatory or discretionary, what you have to submit and by when, and how long the funder has to act. A clause saying the funder "may" adjust the debit on request is not a floating payment. It is a fixed payment with a request form attached.

Ask also what happens between the request and the decision. If debits continue at the old level for three weeks while paperwork moves, the relief arrives after the crisis it was meant to solve.

What a mid-deal fall does to the finish date

Six months run at $120,000 of revenue, so $8,400 a month, and $50,400 is delivered. Remaining: $79,600. Revenue then settles at $70,000 a month, so $4,900 a month, which takes a further 16.2 months. Total duration 22.2 months, against the 15.5 you would have projected at the opening run rate.

Nothing has gone wrong and nothing has been breached. The cost is still $30,000. But the obligation now crosses a second budget year, it will be on your debt schedule the next time you apply for anything, and if the agreement carries an outside maturity date at, say, eighteen months, the remaining balance falls due in a lump on that date, out of a business that is smaller than the one that signed.

Run the same calculation at your worst twelve-month revenue rather than your best before you sign. That gives you the long version of the term, and the long version is what the outside maturity date will be tested against.

Six questions before you sign

1. What is the total repayment in dollars, and what will actually hit my bank account after fees?
2. What percentage of what revenue, measured how, and debited how often?
3. Is there a minimum payment or an outside maturity date?
4. Is reconciliation mandatory, and what evidence triggers it?
5. Is there a written early-payoff discount?
6. What is a default, and what happens on the first returned debit?

The first two questions give you the cost. The last four tell you what the product does when the plan does not survive contact with the year.