Which Type of Funding is Better for Your Business: Business Capital Loan or Revenue-Based Financing?

Being an entrepreneur is not an easy task. Most of the time, it might feel as if you are just putting out one fire after another. Ask any business owner - new or established one - and almost all of them will tell you that challenges are just part of the journey. Perhaps one of the biggest obstacles for small business owners is raising capital or securing funding to scale their business. Whether you're just starting out or planning to expand, choosing the right type of financing can make or break your growth strategy.

Two of the most common financing options available today are business capital loans and revenue-based financing. Both offer access to cash, but how they work, how much they cost, and who they suit best are very different.

This article compares these two popular funding options. We'll explain how each one works, highlight the pros and cons, and help you decide which is right for your business. If you're looking at working capital funding or trying to figure out the maze of small business loans, this is for you.

What is a Business Capital Loan?

In a nutshell, a business capital loan offers entrepreneurs a lump sum of cash from a financial institution or online platform. It comes with a set repayment term and is repaid in fixed monthly payments. It has a fixed interest rate and repayment schedule.

Designed to help businesses with large expenses like expansion, buying equipment, hiring staff, or covering long-term costs, these loans provide stability to many small businesses as they serve as a predictable and structured funding option.

There are many types of business capital loans, including business working capital loans, SBA loans, and traditional bank loans. These loans tend to have stricter eligibility requirements as compared to other funding solutions, such as a solid business plan, a good personal credit score, and possibly collateral or a personal guarantee. Approval times can vary depending on the lenders; banks may take weeks, while online options might take just a few days or even hours, in some cases.

One reason why a business capital loan is so popular with most industrialists is because of its stability. You know your repayment terms upfront, which makes financial planning easier. But funding decisions can be tough, and the paperwork isn’t light.

However, if you're planning for long-term growth, a business capital loan might be exactly what your business needs.

What is Revenue-Based Financing (RBF)?

If a business capital loan is on one end of the funding spectrum, then revenue-based financing (RBF) lies completely on the other end of it. Also known as revenue-based funding, this type of financing solution can get you upfront capital in exchange for a share of your business’s future revenue.

Sounds simple, doesn’t it? Unlike traditional loans with fixed monthly payments, RBF allows you to repay the borrowed funds with a percentage of your monthly revenue until the total repayment amount (usually three to five times the original amount) is reached. This financing option offers flexible repayment, which adjusts based on how well your business performs.

RBF is ideal for companies with high and recurring monthly revenue - think SaaS businesses, e-commerce, or early-stage companies that don’t want equity dilution or can’t qualify for traditional bank loans.

Unlike venture capital, RBF doesn’t require giving up ownership and unlike bank loans, there’s usually no fixed repayment terms. However, the cost can be higher overall compared to a business capital loan.

Startups and entrepreneurs with steady revenue streams and a clear growth plan can benefit from this type of financing. It’s fast, doesn’t demand a perfect credit score, and works well if your cash flow is seasonal or inconsistent.

In short, RBF is a great tool for raising capital without the strings of equity financing or the rigidity of debt financing.

Key Differences Between a Business Capital Loan and Revenue-Based Financing

Business capital loans and revenue-based financing differ in many aspects such as structure, cost, and flexibility. But the biggest difference lies in repayment.

With a business capital loan, a fixed amount gets deducted every month as repayment. This is a great feature as it helps business owners with planning, but there is no room for fluctuation. If your revenue dips, you still owe the same amount. On the other hand, revenue-based financing adjusts with your revenue. You pay more when you earn more, and less when sales dip.

Another important feature is eligibility. Business capital loans typically need a strong credit score, detailed financials, and sometimes collateral. RBF is based more on your business’s revenue than your credit history, making it easier to access for companies with limited or bad credit history.

Funding approval time also tends to vary. While capital loans, especially from traditional banks or the SBA, can take weeks, RBF is usually faster, and funding decisions can come in a couple of days.

Finally, while business capital loans are generally cheaper over time, RBF offers more flexibility. So, when it comes to these two funding options, it’s about choosing between predictability and adaptability. The right choice depends on your revenue model, financial health, and business goals.

Pros and Cons of Business Capital Loans

Pros:

Lower Overall Cost

Business capital loans have lower interest rates compared to short-term financing or RBF. If you have a good credit score and you qualify for options like SBA loans, the annual percentage rate (APR) can be quite competitive. This makes the total cost of the loan more affordable over time, especially for large funding needs.

Fixed Repayment Schedule

This type of funding solution provides predictability to business owners through fixed monthly payments. It makes budgeting easier as you know exactly how much you need to repay every month.

Builds Business Credit

These loans can be very helpful if you are looking to build your business credit. Repaying a business capital loan successfully can lead to better financing options in the future, including lower interest rates and higher loan amounts.

Cons:

Rigid Repayment Terms

The very aspect of this type of loan that offers stability can also become a double-edged sword as you will still need to repay the same amount even when your revenue slows down. This can put a strain on your cash flow during off-seasons or unexpected downturns.

Tougher Eligibility Requirements

The hard truth is it is not easy to qualify for these types of loans. Many lenders look closely at your credit score, business history, and financial statements. Some may also require a personal guarantee or collateral, making it hard for new businesses to qualify.

Slower Approval Process

Thanks to its long underwriting processes, especially with traditional bank loans or SBA loans, funding decisions can be a long wait. It can take several weeks to get approval, which really doesn’t help if you are looking for fast funding.

Pros and Cons of Revenue-Based Financing

Pros:

Flexible Repayment Terms

RBF takes flexibility to another level as repayments align with your company’s revenue. So, when the revenue dips, you pay less but when it peaks, you pay more. This flexibility is perfect for businesses with seasonal or fluctuating incomes.

Fast Access to Capital

No more waiting around when it comes to accessing cash with RBF. There’s minimal paperwork, , and no waiting on slow underwriting.

No Equity Dilution

Revenue-based financing allows you to keep the ownership of your company to yourself, unlike venture capital or equity financing. This keeps you in control of decisions and profits.

Cons:

Higher Total Repayment Amount

While the percentage you pay monthly may seem small, the total repayment can be steep. That makes it more expensive than a business capital loan.

Limited Eligibility

RBF might be easier to access compared to traditional loans, but you must show that your business has a steady, recurring revenue. If you’re an early-stage venture without predictable income or annual revenue benchmarks, you may not qualify.

Short-Term Use Only

Mainly designed for short-term needs and cash flow support, RBF is not meant for large, long-term investments. So, if you’re thinking of buying property or major asset, you need to look for another funding option.

Which One Is Right for You?

A business capital loan is perfect for your business if:

You need a big investment for long-term projects such as operation expansion, hiring or buying equipment. You have a solid credit score, a detailed business plan, and can handle fixed monthly payments and if you are looking for a lower total repayment and can work with stricter qualification criteria, then look no further than business capital funding.

These loans can be really useful if you want to build your business credit or have plans to get higher financing amounts in the future. This funding option can make it easier for you to build a strong relationship with lenders.

If your business has a predictable cash flow and you want a structured approach to business financing, a business capital loan is likely your best route. Also, certain types, such as business working capital loans, provide more tailored support for day-to-day operations.

Choose revenue-based financing if:

Your business has strong monthly revenue but does not qualify for traditional bank loans. You need fast access to working capital funding, and you prefer a flexible repayment schedule over a fixed term.

RBF works best for SaaS companies, e-commerce stores, or early-stage businesses that value agility. You may not  need to give a personal guarantee, and you won’t dilute ownership like with venture capital. It’s a great way to scale without sacrificing control.

But make sure you understand the repayment amount and structure. Since RBF is based on future revenue, the total cost is higher, and payments can fluctuate. If your company’s revenue is consistent and growing, that’s when this model really works.

Conclusion

Choosing between a business capital loan and revenue-based financing depends on your business’s unique situation. If you want predictability, fixed payments, and long-term growth, a business capital loan might be what you need but if your business experiences fluctuating revenue and you are looking for speed and flexibility, there is no better funding option than the revenue-based financing (RBF). Either way, you can better financing options depending on your revenue model, growth plan, and risk appetite.

FAQs

Is a business capital loan better than a line of credit?

There is no easy answer to this question. A business capital loan offers a lump sum upfront with fixed repayment terms, making it ideal for big one-time expenses. On the other hand, a line of credit is more suited for continuous, short-term needs.

What happens if my revenue dips in an RBF agreement?

There is no need to worry as your repayment amount will adjust accordingly. That’s one of the important advantages of revenue-based financing. The way you won’t be overwhelmed during slow months, unlike fixed loans.

Do I need a high credit score to get a business capital loan?

Most traditional bank loans and SBA loans require a strong personal and business credit score. However, some online options may work with lower scores. Still, better credit often means better interest rates and repayment terms.

Is revenue-based financing available to brick-and-mortar businesses?

Yes, especially if they have steady sales. Restaurants, gyms, and retail stores can qualify for revenue-based loans if they show consistent monthly revenue. However, it's more popular in tech and e-commerce sectors.

Can I use both a business capital loan and RBF together?

Yes, many businesses use a mix of financing options. You could use a business capital loan for large purchases and revenue-based funding for short-term cash flow support. Just be careful to manage your repayment obligations.

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