A repayment cap is a dollar fee on an amortising loan, so its rate depends on how fast revenue grows.
Revenue-based financing has no interest rate on the term sheet, so you have to build one: lay out the monthly remittances until the repayment cap is reached, then take the IRR of those cash flows against the advance. On an illustrative $1,000,000 advance with a 1.5x cap, repaid from 8 per cent of monthly revenue that starts at $500,000 and grows 3 per cent a month, the cap is paid off in 26 months and the effective cost is an APR of 35.1 per cent, or 41.3 per cent compounded.
Worked in full in The Venture Capital Associate by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
Revenue-based financing (RBF) sells itself on simplicity: no equity, no warrants, no fixed instalment, and a single fee expressed as a multiple. The company receives cash today and hands over a fixed share of revenue each month until it has repaid the advance times the cap. Because the fee is fixed in dollars and the speed of repayment depends on revenue, the annualised cost is not known at signing. It is a function of how well the business does, and it rises when the business does well. That is the number a founder, a CFO or an associate comparing term sheets needs to see.
| Term | Value |
|---|---|
| Advance | $1,000,000 |
| Repayment cap | 1.5x |
| Total to repay | $1,500,000 |
| Fee in dollars | $500,000 |
| Share of monthly revenue remitted | 8% |
| Monthly revenue, month 1 | $500,000 |
| Monthly revenue growth | 3% |
| Upfront fee | none |
Three per cent a month compounds to 42.6 per cent a year. Caps, remittance shares and fees vary widely between providers; these figures are illustrative, not market quotes.
Paymentt = remittance share × revenuet, until cumulative payments reach advance × cap
Month 1: 8% × 500,000 = 40,000
Revenue grows 3 per cent a month, so the payment grows with it: 46,371 in month 6, 55,369 in month 12, 78,943 in month 24.
Cumulative payments reach 567,681 after a year and 1,377,059 after 24 months. Month 25 pays 81,312 and month 26 pays the balance of 41,629, which brings the total to exactly 1,500,000. Term: 26 months.
Cash flows: −1,000,000 at month 0, then the 26 payments
Monthly IRR = 2.923%
APR = 2.923% × 12 = 35.1%
Effective annual rate = (1 + 2.923%)12 − 1 = 41.3%
Excel, with the advance as a negative in B1 and the payments in B2:B27: =IRR(B1:B27)*12 for the APR and =(1+IRR(B1:B27))^12-1 for the effective rate. Build the payment column as =MIN(share*revenue, cap_total-SUM(payments above)) so the last month stops at the cap.
| Month | Payment | Cumulative repaid |
|---|---|---|
| 1 | 40,000 | 40,000 |
| 6 | 46,371 | 258,736 |
| 12 | 55,369 | 567,681 |
| 18 | 66,114 | 936,577 |
| 24 | 78,943 | 1,377,059 |
| 26 | 41,629 | 1,500,000 |
The company pays $500,000 for the use of money that it repays steadily from the first month, so the average balance outstanding is well under the full $1,000,000. That is why the effective rate is so much higher than the 23.1 per cent a year you get by spreading the 50 per cent fee over the 2.17-year term. Treat the 1.5x cap as what it is: a dollar fee on an amortising loan with a variable schedule.
| Case | Months | APR | Effective annual |
|---|---|---|---|
| Revenue falls 2% a month | 69 | 20.2% | 22.2% |
| Flat revenue | 38 | 27.4% | 31.2% |
| Growth 1% a month | 33 | 30.2% | 34.8% |
| Growth 3% a month (base) | 26 | 35.1% | 41.3% |
| Growth 5% a month | 22 | 39.3% | 47.2% |
| Growth 8% a month | 19 | 44.8% | 55.3% |
| Cap 1.3x | 24 | 24.7% | 27.7% |
| Cap 1.8x | 29 | 45.8% | 56.7% |
| Remittance 6% of revenue | 31 | 28.3% | 32.2% |
| Remittance 12% of revenue | 19 | 48.4% | 60.7% |
| 3% upfront fee, $970,000 received | 26 | 37.9% | 45.3% |
The pattern is the opposite of a bank loan. The better the company performs, the faster it repays and the more expensive the money turns out to have been: at 8 per cent monthly growth the same contract costs 44.8 per cent APR. If revenue shrinks, the cost falls to 20.2 per cent, but the company carries the obligation for almost six years and hands over a share of every dollar of revenue the whole time. The remittance share is a lever founders often under-negotiate: moving it from 8 to 12 per cent shortens the term to 19 months and lifts the APR to 48.4 per cent, because the dollar fee is unchanged and the money is returned sooner.
The remittance is a claim on revenue, not on cash flow. A company with 75 per cent gross margins remitting 8 per cent of revenue is giving up 10.7 per cent of its gross profit every month. Model it in the runway, as in how to calculate a startup's cash runway, before treating it as non-dilutive free money.
The common mistake is to read the cap as a simple interest rate. "1.5x" sounds like 50 per cent, and a founder who expects to repay in about two years divides by two and thinks of it as 25 per cent a year. Neither reading is the cost. The 50 per cent ignores the term, and the 25 per cent understates the rate because it ignores that repayment starts in month one, so the money is outstanding for much less than two years on average. The correct comparison is IRR against IRR: build the cash flows of each option and annualise them on the same basis. Against venture debt, include the warrants and the end-of-term fee on that side too, as worked in how much venture debt really costs; against equity, compare the dollar fee with the dilution the same $1,000,000 would cost at the next round.
The second mistake is to model one revenue path. The cost of RBF is a range, not a number, so run at least a flat case and a strong case. Here the honest description of the offer is "27.4 to 44.8 per cent APR, depending on growth".
The unit economics that tell you whether a business can carry a revenue-linked claim are worked in the free workbooks for The Venture Capital Associate.
No. The 50 per cent is a dollar fee, $500,000 on a $1,000,000 advance, paid back gradually from the first month. In the illustrative case it is repaid in 26 months, which works out at a 35.1 per cent APR. Spreading the fee over the term as simple interest gives 23.1 per cent a year and understates the cost, because the average balance outstanding is much lower than the advance.
Because the fee is fixed in dollars and faster growth repays it sooner. The same 1.5x cap and 8 per cent remittance cost 27.4 per cent APR if revenue is flat and 44.8 per cent if revenue grows 8 per cent a month, with the term shrinking from 38 to 19 months. A fast-growing company pays the same fee for a shorter loan.
Put the advance as a negative in the first cell, then one row per month with =MIN(share*revenue, total cap minus payments already made). Take =IRR(range)*12 for the APR, or =(1+IRR(range))^12-1 for the effective annual rate. In the worked case the monthly IRR is 2.923 per cent, an APR of 35.1 per cent and 41.3 per cent effective.
This article is one calculation from The Venture Capital Associate. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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