Revenue-based financing reaches small firms in minutes, but a flat fee can hide a high annual cost. Two respondents explain when it funds growth and when it simply prices risk in a new way.

Revenue-based financing has become the quickest way for many online sellers to raise cash. An offer appears inside the sales platform, approval takes minutes, and repayments rise and fall with sales. Still, the speed of revenue-based financing is not the same as access. The question is whether these products reach businesses that banks turn away. Or do they simply price the same risk in a new way? Our roundup on embedded finance after launch covers the work facing firms that offer them.

We asked one question: is revenue-based financing or embedded lending filling the SME credit gap, or just pricing risk differently? We wanted founders and credit leads at SME lenders, financing providers and embedded credit platforms. SME owners who had used them were welcome too. Real terms and outcomes mattered more than commentary. Two people answered in this round, and we used both. Neither is a lender, but one reviews real offers for business owners.

How revenue-based financing works

Revenue-based financing swaps an interest rate for a fixed fee, repaid as a share of future sales. Shopify Capital is a common example of revenue-based financing. Merchants repay a fixed percentage of daily sales, only on days they make sales. They must repay within 18 months, Shopify explains. Underwriting is automatic and draws on sales, disputes and customer data. In addition, merchants need at least 90 days of sales on Shopify to qualify. As a result, the platform sees live trading data that a bank may never get, but only for sales on its own system.

A 12% fee can mean a much higher rate

John Mac founded Exit Evidence, which helps Shopify businesses prepare to sell, and he reviews financing offers for his clients.

“I’m John Mac, founder of Exit Evidence and OPENBATT. I help Shopify businesses with $1m to $20m in revenue prepare to sell, and I previously sold an omnichannel outdoor retailer.

Revenue-based financing is often a replacement for a bank overdraft, not a fix for an SME credit gap. We recently reviewed a $250,000 offer with a 1.12x multiple and a 15% sweep of future revenue. The borrower saw it as a 12% cost, or $30,000. At their forecast sales, the $280,000 would be repaid in about seven months. Running the weekly cash flows through a spreadsheet showed an annualised rate of around 47%.

That’s fine if the money buys stock that sells within 90 days, and the contribution margin on that stock beats the cost. It’s not fine if it pays for hiring, product development or stock with an uncertain sell-through rate. The sweep is also taken from revenue, not profit. So if a business spends more on marketing or discounts to lift sales, the lender gets paid faster, not the borrower.

I tell clients to model any borrowing month by month and run best, base and worst cases, such as 70%, 100% and 130% of forecast. Faster sales can push the annualised cost up, because you repay the same fee sooner and the platform can lend to you again.

Platforms do have good data, but only on the sales they can see. We recently advised a business where 40% of turnover was wholesale, and platforms that only saw the 60% online sales kept refusing it. The same goes for overdraft use, failed direct debits, tax arrears and sales through other channels. A platform can also lift its approval rate by lending only to firms whose bank data already shows strong cash flow.

To judge a platform, ask whether it reports how many of its customers had been refused credit by banks. If it doesn’t, it may be taking customers from banks rather than adding new credit. I’d also look at repeat borrowing, successful repayment, and how many borrowers still have the same credit arrangements after 12 months.”

John Mac, Founder, Exit Evidence

His maths holds up. We modelled his example as equal weekly repayments of $280,000 on $250,000. Repaid over about 30 weeks, that gives an effective annual rate of about 47%. Repaid over 26 weeks, it rises to about 56%. So a flat fee hides how much the true cost of revenue-based financing depends on speed. His 90-day stock test is a practical rule, because fast-selling stock can earn enough margin to cover a high annual cost.

His wholesale example shows the limit of the data behind revenue-based financing. A lender that sees only online sales will misjudge a business with large offline revenue. However, his idea that platforms should publish how many borrowers banks refused is his own proposal, not an industry standard. We could not verify his client examples, and we’ve softened his original claim that such platforms are “stealing customers” from banks.

Flexible repayments suit seasonal sellers

Conor Smart is a director at Arklavo, an apparel business whose sales rise and fall through the year.

“Embedded lending is a convenient way for businesses to get funds quickly, especially those a bank might not consider for traditional finance. Shopify Capital, for example, offers loans to selected Shopify merchants, who apply from within Shopify’s admin panel. Merchants repay a percentage of their sales each day they make sales, within a maximum of 18 months, and offers are based on their sales history. For a business like Arklavo, where sales go up and down through the year, that could be attractive, since we’d pay less in slower weeks.

Still, it’s important to understand what you’re getting into. Embedded lending can be a good option, but it’s still a loan, with all the usual considerations. Make sure the money will be put to good use and pay for itself within the term. It’s easy to click ‘accept’ on a nicely packaged offer, but make sure you’re comfortable with the total you’ll pay back compared with what you receive.”

Conor Smart, Director, Arklavo

His description matches Shopify’s own terms, including the 18-month limit and repayments tied to daily sales. Flexible repayments are the main advantage of revenue-based financing for a seasonal seller, because payments shrink in quiet weeks. Also, as Mac shows, a slow season stretches the term and lowers the annual rate, while a strong one raises it. Arklavo has not used Shopify Capital, so his view is a merchant’s reading of the terms rather than an outcome.

Is it filling the credit gap?

The data on revenue-based financing points both ways. The Federal Reserve’s 2026 Small Business Credit Survey found 29% of applicants sought finance from online lenders in 2025, up from 17% in 2020. However, 60% of online lender borrowers said costs were higher than expected, against 37% at small banks. High interest rates and unfavourable repayment terms topped their complaints. In the UK, challenger, specialist and non-bank lenders made up 68% of SME lending in 2025, the British Business Bank found. Its report does not track revenue-based financing separately.

Regulators are pushing for clearer pricing. California now requires commercial financing costs to be stated as an APR, and Texas has brought sales-based financing into its disclosure rules, Venable notes. Therefore, the gap that revenue-based financing fills may be speed and convenience more than access.

What works for SMEs weighing revenue-based financing

The answers point to a clear order of work. First, turn any flat fee into an annual rate, using your own weekly sales forecast. Next, run best, base and worst cases, as Mac suggests, because faster sales raise the annual cost. Then match the money to stock that sells within about 90 days, at a margin above that cost. Finally, compare any revenue-based financing offer with an overdraft or bank line before you accept. Firms holding cash with fintech providers should also know where it sits, as our explainer on business deposits at fintechs shows.

What to watch next

Disclosure rules are the next test for revenue-based financing. Watch New Jersey’s pending bill, which would cover sales-based financing, and Texas’s registration deadline of 31 December 2026. Also watch whether the next Federal Reserve survey shows borrowers’ cost surprises easing. In addition, platforms that publish how many of their borrowers banks had refused would give a clearer answer on the credit gap.

Above all, revenue-based financing is a tool for funding fast-turning stock, not a cheap loan. Owners who turn the fee into an annual rate before they click accept will know which side of that line they are on.

FintechBits covers payments, banking and fintech developments for readers in the US and UK. This article is for information only and is not financial advice. Views expressed are those of the FintechBits editorial team.