Revenue-Based Financing Cap
Revenue-Based Financing
Definition
A revenue-based financing cap is the maximum total repayment amount owed under a financing arrangement that is repaid as a percentage of borrower revenue.
Why it matters
The cap defines upside for the investor and effective cost for the borrower. Speed of repayment, revenue volatility, and minimum payments determine realized yield.
Common misconceptions
- •A 1.5x cap does not imply the same annual return across deals; timing controls IRR.
- •Revenue share payments can be flexible but still strain cash flow in low-margin businesses.
Technical details
Yield Drivers
Realized return depends on advance amount, repayment cap, revenue share percentage, payment frequency, minimum payments, and growth or contraction in sales.
Covenants
Agreements often include reporting covenants, bank-account access, payment waterfalls, restrictions on senior debt, and events of default for misreported revenue.