Revenue-Based Financing Cost: Why the Same Fee Gives Different APRs

There are three moving parts in the contract:

• Advance: the money you receive.
• Repayment cap: the total you'll repay, often written as a multiple of the advance.
• Revenue share: the percentage of monthly revenue remitted until the cap is met, sometimes with a minimum payment.

The fee is the cap minus the advance. Because repayment follows revenue, there's no fixed end date, though contracts may include a maximum term or a minimum monthly payment. Read those clauses closely, since they decide what happens when revenue is weak. Providers describe their products differently, so check what's included and how the cap is calculated, and see the comparison in Pipe, Capchase and Mercury venture debt.

Say you take a $100,000 advance with a repayment cap of $112,000, which makes the fee $12,000, and you remit 10 percent of monthly revenue. The effective annualized cost then moves with revenue:

1. In this example, at $150,000 of monthly revenue you remit $15,000 a month and repay in about 7.5 months, for an annualized cost of roughly 33 percent.
2. In this example, at $90,000 of monthly revenue you remit $9,000 a month and repay in about 12.4 months, for roughly 21 percent.
3. In this example, at $300,000 of monthly revenue you remit $30,000 a month and repay in about 3.7 months, for roughly 59 percent.

In this example, the fee is the same $12,000 in all three cases. The APR differs because the money is outstanding for a different time. In this example, these are nominal annualized rates from the internal rate of return on the monthly cash flows, and your contract's payment timing may change them slightly.

Growth makes the point stronger. Private B2B SaaS companies had median ARR growth of 25 percent in 2024¹, so if your revenue grows, repayment speeds up and the annualized rate rises.

Use a spreadsheet with a row per month:

1. Put the advance received as a positive cash flow in month zero.
2. Forecast monthly revenue, multiply by the revenue share and enter the payments as negatives.
3. Continue until the cumulative payments equal the cap.
4. Use the internal rate of return function on the monthly flows, then multiply by 12 for a nominal annual rate.
5. Repeat for a slow, base and fast revenue case.

Also add any upfront fees or costs that aren't part of the cap, such as an origination or legal fee, as a reduction in the advance you actually receive. If there's a minimum payment, include it in the low-revenue case. The result is a range, and the range is the honest answer.

It tends to fit companies with predictable, recurring revenue that need working capital for a specific purpose with a quick payback, such as ad spend or inventory, and don't want to give up equity. It fits poorly if your margin can't absorb a fixed share of revenue, or if you'd be repaying quickly at a very high annualized rate.

Ask these before you sign:

• Does the revenue share leave enough cash after costs?
• What does the same fee look like at your fastest realistic growth?
• Is the payback justified by the return on what you'll spend the money on?
• Are there personal guarantees, liens or covenants?

Compare against cheaper options. An SBA loan may cost less but takes longer and needs more paperwork, as covered in revenue-based financing versus SBA 7(a) loans, and for consumer brands see royalty-based financing for ecommerce.

Line up each option on the same three measures: total dollar cost, effective annualized rate and what happens if revenue drops. Merchant cash advances typically collect fixed daily or weekly debits, and their effective rates can be much higher, as covered in the merchant cash advance calculator. Term loans have fixed payments and a known end date.

Say you need $100,000 for six months. In this example, a loan with a known schedule can be compared with RBF by putting both into the same spreadsheet. Whichever you choose, agree what happens if the provider changes terms and keep your cash forecast updated so the revenue share is included as an outflow.