Revenue-Based Financing (RBF) is quickly gaining traction among small and medium-sized businesses looking for flexible funding without giving up equity or facing rigid loan structures. But while the concept may sound simple—borrow now, pay back as you earn—there are two critical elements every business owner must understand: factor rates and repayment caps.
If you’re considering RBF, knowing how these terms affect the total cost and timeline of your funding is essential. This post breaks down both, with real examples, best practices, and common pitfalls.
What Is a Factor Rate?
Unlike traditional loans that charge interest over time, revenue-based financing uses a factor rate to determine the total repayment amount upfront.
A factor rate is a fixed multiplier used to calculate how much you’ll repay in total. It’s typically expressed as a decimal number, like 1.3 or 1.5.
Example:
Let’s say you receive $100,000 in funding with a factor rate of 1.3.
You’ll repay: $100,000 x 1.3 = $130,000
This $30,000 is the total cost of borrowing—regardless of how quickly or slowly you pay it back.
Factor Rate vs. Interest Rate
It’s easy to confuse the two, but they work differently:
Factor Rate
Interest Rate (APR)
One-time multiplier
Ongoing annual charge
Doesn’t change over time
May increase due to missed payments
Total repayment is fixed
Depends on payment schedule & compounding
Pro Tip: A 1.3 factor rate can equate to an APR of 35% to 60%, depending on how fast you repay. Faster payments mean a higher effective APR.
What Is a Repayment Cap?
A repayment cap is the total maximum amount you’ll be required to repay under your RBF agreement. It’s usually calculated using the factor rate, and once you hit that cap, the agreement ends—even if it’s sooner than expected.
Example:
Using the previous example:
Funded amount: $100,000
Factor rate: 1.3
Repayment cap: $130,000
Even if you reach that cap in just 6 months due to booming sales, your obligation ends there.
Why Factor Rates and Caps Matter
1. They Determine the Total Cost
Unlike traditional loans where the interest can add up unpredictably, with RBF you know upfront how much you’ll repay. That makes planning easier.
2. They Affect Your Cash Flow
A higher factor rate means a higher repayment cap—and potentially more strain on your future revenue. Choosing a lower rate reduces long-term cost but may come with stricter qualification requirements.
3. They Vary by Industry & Risk
A retail store with stable cash flow might get a 1.2 factor rate. A newer e-commerce startup might get 1.5. Lenders adjust rates based on perceived risk and revenue predictability.
Tips for Choosing the Right Factor Rate
Compare Offers: Don’t accept the first offer. Ask multiple RBF providers for quotes.
Negotiate: Some lenders will adjust the factor rate based on volume or performance.
Read the Fine Print: Look out for early payment penalties or “double-dipping” clauses that let lenders recalculate repayments even after you hit the cap.
Common Mistakes to Avoid
Focusing Only on the Funded Amount
A $100K loan at 1.5 costs more than a $120K loan at 1.2.
Ignoring the Speed of Repayment
If you pay back faster due to strong sales, your APR is higher, even if the total repayment is the same.
Not Planning for Repayment Caps
Your obligations end at the cap—but only if all terms are followed. Missing payments could trigger additional fees.
Understanding factor rates and repayment caps is crucial before entering a revenue-based financing agreement. While RBF offers unmatched flexibility and speed, the real cost lies in these two numbers. Know them. Negotiate them. And compare them carefully to other financing options.
