Start with the legal and payment structure
| Feature | Revenue-based structure | Term loan |
|---|---|---|
| Core concept | Repayment is tied in some way to business revenue or receivables under the written agreement. | Borrowed principal is repaid with interest and any fees over a stated term. |
| Payment behavior | Payments may vary with sales, or the agreement may use fixed periodic withdrawals subject to reconciliation. | Payments are commonly scheduled, though rate and payment terms vary. |
| Best comparison metric | Net proceeds, total required remittance, estimated duration, payment frequency, and effective annualized cost. | Net proceeds, annual percentage rate when provided, total interest and fees, term, and prepayment terms. |
Model the cash-flow downside
Use a conservative revenue forecast, not only last month’s sales. Test what happens if sales fall, a major customer pays late, or the business experiences a seasonal slowdown. Confirm in writing whether payments adjust automatically, require a reconciliation request, or remain fixed.
Do not compare a factor with an interest rate
A factor multiplied by the funded amount can show a total repayment amount, but it does not account for time in the way an annualized rate does. Convert every offer into net proceeds, total repayment, payment frequency, and an estimated annualized cost before comparing alternatives.
Questions to ask
- Is the transaction a loan, a purchase of receivables, or another commercial-finance structure?
- What cash amount reaches the business after fees?
- What is the total amount the business must pay or remit?
- Can payments be reconciled to actual revenue, and how?
- Is there a personal guarantee, security interest, confession of judgment, or prepayment condition?
The FTC has warned small businesses to scrutinize funding amounts, collateral, personal guarantees, and withdrawal practices. Read the complete agreement and obtain legal or accounting advice when the obligation is material.
Primary sources
General educational information only. This page is not a financing offer or legal, tax, or accounting advice. Actual products and terms depend on the applicant, provider, underwriting, and written agreement.