Revenue-based financing is a business loan that is repaid as a fixed share of the business's daily sales, instead of a fixed monthly EMI. It is also called sales-linked financing. A close relative is the merchant cash advance, in which the finance company buys a share of the business's future card sales instead of lending money. The lender usually offers it inside a payment or software platform that the business already uses.
Here is how it works. The lender gives the business a lump sum. The business agrees to repay that sum plus a fixed fee. Every day, the payment platform keeps a small percentage of the business's card sales and sends it to the lender, before the rest reaches the business. On a busy day, the business repays more. On a slow day, it repays less. The loan ends when the full amount has been repaid.
Take, for example, a cloud kitchen in Hyderabad that takes all its payments by card and UPI. Its merchant acquirer, the company that receives card payments on behalf of the business, can see that it sells about ₹40,000 a day. So a lender offers it ₹5 lakh, to be repaid as ₹5.5 lakh in total. Every day, 8% of the card sales goes to the lender. On a ₹40,000 day, that is ₹3,200. At that rate, the loan is repaid in about six months.
The lender decides the loan from the sales it can already see, not from audited accounts. And it collects the money automatically from the same sales. This is an example of embedded finance: a financial product built into a service that is not a bank. Platforms that offer payments built into business software, such as salon booking or restaurant software, can offer the loan on the same screen.
How is it different from a normal loan? A normal MSME loan has a fixed EMI every month, whatever the sales. With revenue-based financing, the repayment rises and falls with sales. This helps a business whose sales change with the season. A similar idea is used for students: an income share agreement (ISA) is repaid as a share of salary, not of sales.