Revenue-Based Financing

Basics

Many entrepreneurs and small businesses with healthy cash flows and strong operations struggle to access capital to support their business. Entrepreneurs may not be prepared to meet the repayment terms or have the required collateral for traditional term-loans offered by CDFIs. Alternative equity-based options to access capital present other challenges for entrepreneurs. Their business models may be incompatible for equity investment, or they may not want to relinquish a share of their business to access capital. CDFIs could expand support to these small businesses with revenue‑based financing (RBF), a flexible funding model tied to business performance.

Benefits

RBF allows CDFIs to finance promising businesses looking for growth capital without requiring collateral or fixed monthly obligations from term loans. This is done by linking loan repayments to a percentage of the business’s revenue. CDFIs share in the success of RBF-supported businesses. As business revenues grow, CDFIs are repaid faster. And, depending on how products are structured, RBF can offer CDFIs returns that are modestly higher than term loans.

In addition to being less risky than equity investments, RBF positions CDFIs to support mission‑aligned entrepreneurs even if they have credit constraints, limited collateral, or uneven profitability. CDFI lending programs incorporating RBF can support borrower sustainability, improve portfolio performance, and increase capital recycling.

RBF can be a win–win: For businesses, it offers access to capital without requiring collateral or fixed payments; for CDFIs, the product can bridge the gap between term lending and equity‑like investments.

Background

Broadly defined, RBF provides capital in exchange for a share of a business’s future revenue until the agreed-on repayment cap is reached. Repayments fluctuate in line with business performance. This flexible payment structure is well suited to businesses with positive cash flow but seasonal or inconsistent revenue streams.

For-profit financial technology markets have more experience with RBF than the CDFI industry. However, as of 2023, approximately 20 CDFIs integrated RBF products into their portfolios, often in partnership with technology providers that offer revenue monitoring and automated repayment.

Evidence of Success

Fintech and other for-profit institutions use RBF to drive much-needed capital to asset‑light, revenue‑generating small businesses in ecommerce, subscription services, and seasonal sectors.

Pilots and peer initiatives, including among some CDFIs, suggest that RBF can meet the capital needs of underserved businesses while supporting repayment flexibility and business growth. Early adopters have structured RBF products that refinance predatory financing, scale up businesses, and recycle capital as revenue growth accelerates.

Potential Challenges

Most RBF examples to date focus on borrower outcomes rather than lender performance so it’s not clear how RBF affects CDFI portfolios and operations. Implementing RBF can be expensive. RBF requires CDFIs to set up new underwriting approaches, real‑time revenue tracking, and specialized technology. CDFIs might also encounter accounting, legal, regulatory, reporting, and tax requirements. CDFIs must take care to structure responsible RBF products that remain affordable for borrowers while still addressing the risks associated with inconsistent business revenue.

Bottom Line

RBF has worked in mission-driven lending and in for-profit sectors. CDFIs considering this approach to lending would likely need to reform lending policies; invest in technology and personnel; and navigate accounting, legal, and regulatory issues. The CDFI industry needs to better understand if RBF can address the needs of borrowers and communities alike. Nevertheless, RBF is a way for CDFIs to support promising entrepreneurs and small businesses.

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