Struggling to choose between revenue-based financing and equity funding? One keeps you in full control while the other fuels explosive growth – but at what cost? Discover the smart money move for your business with our side-by-side comparison.
When it comes to raising capital for your business, the options can often feel overwhelming. You’ve got loans, venture capital, crowdfunding, and two popular methods: Revenue-based financing (RBF) and Equity Financing.
Both of these offer distinct advantages, but they come with their own sets of pros and cons, depending on the type of business you run and your growth ambitions.
So, what’s the difference between these two funding options, and which one is right for you?
What is Revenue-Based Financing (RBF)?
Revenue-based financing is a flexible, non-dilutive form of funding where you receive capital upfront from an investor in exchange for a percentage of your future gross revenues. Essentially, you’re agreeing to pay back the investment as your business earns, typically until you’ve repaid a multiple of the initial amount you borrowed, known as the “repayment cap.”
For example, if you secure a $100,000 advance with a 1.5x repayment cap, you’ll need to repay $150,000 in total. Each month, you’ll pay a percentage of your revenue, often ranging from 3% to 8%, until the repayment cap is met. If sales go up, your repayment increases; if they drop, your repayment decreases accordingly.
The main appeal of RBF is that the repayments align with your revenue, making it less risky during slower months.
What is Equity Financing?
Equity Financing, on the other hand, involves selling a portion of your company’s ownership to investors in exchange for capital. The investors typically get equity (shares) in your company and a claim on future profits, often with a say in the company’s decision-making process. This means that you’re effectively sharing ownership of your business with the investors.
For startups, equity financing is usually provided by venture capitalists (VCs) or angel investors, who are often looking for high-growth potential. They take on the risk of investing in exchange for the potential of high returns, and they typically expect a return on investment (ROI) when the company gets sold or goes public.
Read article: Revenue Based Financing: How It Works and Who Should Use It
Key Differences Between Revenue-Based Financing and Equity Financing
1. Ownership and control
One of the most significant differences between RBF and Equity Financing is how they impact your ownership and control of the business.
- Revenue-Based Financing is non-dilutive. This means you don’t give up any ownership in your company. The investors don’t get any control over decision-making and aren’t entitled to a share of your company’s profits. Once you repay the agreed amount, the relationship ends.
- Equity Financing, on the other hand, means you’re giving up part of your company’s ownership. In return for their capital, investors get a stake in the business, which often means they gain voting rights or seats on your board of directors. While this can bring valuable expertise and networks, it also means you’ll lose some degree of control over your business direction.
2. Repayment structure
When it comes to how the funding is repaid, RBF and Equity Financing couldn’t be more different.
- RBF repayments are based on a fixed percentage of your monthly revenue. This means that during high-revenue months, your repayments will be higher, while during slower months, they will decrease. The beauty of this model is that repayments are directly tied to your business’s performance, giving you flexibility if your cash flow is unpredictable.
- Equity Financing, however, doesn’t have a repayment structure because you’re not borrowing money; you’re selling a piece of your business. Investors are looking for a return on their investment when the company is sold, goes public, or generates substantial profits. There’s no “due date” for repayment, but the investors expect a high return in the long term.
3. Cost of capital
The cost of capital is another factor that sets these two options apart.
- With RBF, the cost is generally defined by the repayment cap. So, if you borrow $100,000 and the repayment cap is 1.5x, you’ll end up repaying $150,000 in total. While it’s non-dilutive, the cost of capital can still be relatively high when compared to traditional loans. However, the flexible repayment structure helps reduce the risk of overpaying during slow months.
- In Equity Financing, the cost is less obvious. Investors will typically expect a percentage of the business’s equity, and they want a significant return on their investment, often aiming for multiples of their original investment. The cost of equity can vary widely depending on your company’s growth prospects and the stage at which you raise capital. The downside is that you’re giving away a piece of your company, which can be costly in the long run, especially if you grow significantly.
4. Speed and accessibility
Speed and ease of access to capital also differ between the two.
- RBF tends to be much quicker to secure than equity financing. In fact, many RBF providers can offer funding within just a few days. Because the application process is often automated, the paperwork is minimal, and you don’t need to give a detailed business plan or go through multiple rounds of pitching.
- Equity Financing, especially venture capital, can take months. It involves pitching to investors, negotiating terms, and conducting due diligence. It’s also highly competitive, and many investors will require substantial documentation, such as business projections, a market analysis, and possibly even a background check on the business owners.
5. Ideal business type
Each type of financing works better for different business models.
- RBF works best for businesses with recurring revenue or a steady stream of income, think SaaS companies, e-commerce stores, or subscription-based businesses. Since repayments are tied to revenue, it’s ideal for businesses with predictable sales and healthy profit margins.
- Equity Financing is generally suited to high-growth businesses, especially startups in industries like technology, biotech, or fintech, where the growth potential is substantial. Investors are looking for companies that can scale rapidly, often at the cost of giving up some ownership and control.
How Do They Compare?
Here’s a look at the differences that will matter most to you:
| Feature | Revenue Based Financing | Equity Financing |
| Ownership | Retain full ownership, no equity given to investors | Dilute ownership, investors become shareholders |
| Repayments | Repay through % of revenue until cap is hit | No repayments; returns come through share value growth |
| Control & Decision | No board seats or interference | Investors may want input, board seats, or veto power |
| Speed | Fast – funding in weeks | Slowern – funding rounds can take months |
| Access to Capital | Typically $10k–$10M, depends on revenues | Can be much larger, millions to hundreds of millions |
| Risk to Founders | No personal collateral, but must have revenue | Risk is loss of control, dilution of future gains |
| Total Cost | Often less overall than equity in big success cases | High, if your company soars, you’ve given up a chunk |
| Use Case | Good for growth capital, inventory, marketing | Best for major scale-up, R&D, or very rapid expansion |
| Who Qualifies | Revenue-generating businesses (often SaaS, e-commerce) | Startups at all stages, even pre-revenue |
Which option is right for you?
Choosing between Revenue-based financing and Equity Financing ultimately depends on your goals and your business’s current stage.
- Go with RBF if you want to retain full control of your business and prefer flexible repayments tied to your revenue. It’s ideal if your business has steady revenue but doesn’t want the hassle of giving up equity.
- Go with Equity Financing if you’re seeking high-growth funding and are willing to give up ownership in exchange for large amounts of capital and the support of experienced investors. It’s perfect if your business is in a fast-growth industry and you’re comfortable with a long-term commitment to your investors.
Final Thoughts
Revenue-based financing and Equity Financing are both great tools, but they serve different purposes. RBF offers flexibility, no ownership dilution, and a repayment structure tied to revenue.
Equity financing, on the other hand, provides larger sums of capital and the possibility of high returns for investors, but at the cost of giving up some control.
In the end, the choice comes down to what’s best for your business’s growth strategy. Whatever you choose, make sure you understand the terms and how they will affect your company in the long run.
Whether you’re looking for flexible funding or an investor partnership, both options can help you scale, but in very different ways.
Himani Verma is a seasoned content writer and SEO expert, with experience in digital media. She has held various senior writing positions at enterprises like CloudTDMS (Synthetic Data Factory), Barrownz Group, and ATZA. Himani has also been Editorial Writer at Hindustan Time, a leading Indian English language news platform. She excels in content creation, proofreading, and editing, ensuring that every piece is polished and impactful. Her expertise in crafting SEO-friendly content for multiple verticals of businesses, including technology, healthcare, finance, sports, innovation, and more.
