Understanding Revenue-Based Financing

Understanding Revenue-Based Financing for Ecommerce Businesses


Revenue-Based Financing (RBF), sometimes called a Merchant Cash Advance, is considered one of the newest forms of funding, especially in the ecommerce space where sellers are provided funding for essential business expenses based primarily on their current revenue.

When working out a deal with a lender, online merchants often get a Term Sheet outlining essential information like how much cash is being loaned, the amount expected to pay each period, and how much of a fee to be paid.

A Term Sheet is not legally binding or a contract, and an ecommerce business is not obligated to do anything when receiving a Term Sheet. It simply exists to outline the deal a business is working out with a lender.

With any type of financing, things can get confusing quickly, especially if the online seller is not well versed in funding terms and vocabulary. Under the section below are some key phrases and explanations of what an online business might encounter when seeking RBF funding.

What Is a Revenue-Based Financing Term Sheet?

A revenue-based financing Term Sheet is the blueprint for the funding to be received from the lender that outlines all of the conditions and expectations of the loan, which will be officially drawn up after both parties agree to what’s on the Term Sheet.

The main difference between a typical Term Sheet and one designed around revenue-based financing is a lot of the vocabulary used will be centered around a company’s top-line revenue, which will be the primary metric to outline the amount to be loaned, the minimum payment for each payback period, and length of time to pay off the loan.

Common Terms on a Revenue-Based Financing Term Sheet

Disbursed AmountThis is the amount of cash that will be received and subsequently will have to be paid back (with fees applied). This can also be called “Funds Provided”, “Capital Amount”, or “Loan Amount”. 

Collection Period Also referred to as “Payoff Period” or “Repayment Schedule,” this is the total amount of time estimated to pay off the loan.

The length of time for revenue-based financing can vary greatly depending on the type of repayment schedule an eCommerce business is happy with, how high of a fee that is comfortable, and how much of the loan can be paid back each period. With all that information gathered, an online merchant can see repayment schedules as fast as one month, lasting up to six months.

Remittance Some lenders refer to this as “Remit Rate,” “Recoupment Rate,” or “Payment Rate.” When an online seller takes on a revenue-based loan, the minimum payment isn’t pre-set. Instead, it uses a percentage of top-line sales. 

So, if sales for a payment period from Amazon, for example, is $25,000, at a 25% remit rate, the business will pay back $6,250 on the loan for that pay period (plus any fees).

Conversely, if sales are a bit lower the next pay period, say $20,000, then the business will pay $5,000 (plus fees) at that same rate.

Some RBF loans are based on the cash the platform pays the business. Some are based on sales numbers; it’s all relative and comes out to be similar in the amount paid, so eCommerce businesses need to look at the numbers and see if they make sense.

It is important to understand what the remittance rate is based on.  Some lenders will base it on total revenue (sales), and some will base it on the cash the platform pays out to the business.

Fees Any loan must be paid back with some kind of fee attached. Traditional loans usually calculate this amount with interest (typically APR with year+ loans). With a revenue-based loan, fees will be based on either the amount loaned, a percentage of revenue, or a mixture of both.

Total Fees Paid The most critical number to look at is how much beyond the principal the loan will cost.  That is typically referred to as “Total Fees Paid.”

Eligible Gross Sales This term is often found in the repayment schedule or recoupment section. This is the snapshot of revenue used to determine how much to be paid back to the principal balance plus any fees.

In summary, a Term Sheet allows an ecommerce business to get the overall picture of an upcoming loan, how much it will cost, and how long it will take to repay it.

If an online merchant is comparing offers from different lenders, whether it’s for a revenue-based loan or not, they should understand commonly used vocabulary, and fully comprehend all of the lending differences to get the best deal.

Read More: Q&A With Eric Youngstrom From Onramp – Growing Your Online Business

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This article is a part of our Leadership Series, which features industry experts sharing valuable insights for small business owners who sell online. The opinions expressed in this contribution are solely those of the author(s).

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