Revenue-based financing vs venture debt: which fits your startup

Revenue-based financing

An RBF provider advances a sum of money and is repaid as a fixed share of the company's monthly revenue until a pre-agreed total, often 1.1 to 1.5 times the amount advanced, has been paid back. Repayments rise and fall with revenue, so a slow month costs less.

It fits businesses with predictable revenue and good gross margins, such as subscription software and consumer brands, often to fund marketing or inventory where the payback is clear. In India, several platforms specialise in it.

Venture debt

Venture debt is a term loan from a specialist lender to a startup that has recently raised equity from venture capital investors. It usually runs for two to four years, carries interest, and often includes warrants that give the lender a small right to buy shares.

Companies use it to extend runway between equity rounds, so the next round can be raised at a higher valuation, or to fund equipment and working capital. Because repayment is fixed, it adds risk if growth stalls.

Side by side

Questions to ask before you sign

• What is the total amount repaid, and what does that work out to as an annual cost at your expected growth?
• Are there covenants, such as minimum cash balances or revenue levels, and what happens if you miss them?
• Does the lender take security over the company's assets or bank accounts?
• For venture debt, how many warrants are included and at what price?
• Can you repay early, and is there a penalty for doing so?

When to avoid them

Both instruments need cash to repay. A company that is burning money with no clear path to the next equity round, or whose revenue is unpredictable, can find fixed or revenue-linked repayments squeezing the spending that drives growth. Debt is best used to stretch a plan that is already working, not to rescue one that isn't. If the money is meant to fund a long, uncertain build, equity is usually the better fit, even though it dilutes.