Two products
A term loan is credit: a lender advances a sum and you repay it in fixed instalments over a fixed term at an interest rate, usually with a personal guarantee. Revenue-based financing, and its card-sales cousin the merchant cash advance, is not structured as credit. The financier buys a fixed amount of your future revenue at a discount: you receive, say, €50,000 today and hand over €57,500 as a percentage of every day's or week's takings until the amount is reached. There is no interest rate and no fixed term; the repayment speeds up when sales are good and slows when they are not.
The factor rate
The price is quoted as a factor: 1.15 means you repay 1.15 times the advance. That looks like 15 percent, and on a loan over one year it would be. But the money is repaid continuously from the first week, so on average you have only about half the advance outstanding, and it is typically gone within six to nine months. Fifteen percent of the full amount for half the amount over half a year is an annual cost of roughly 55 to 60 percent. The faster your sales, the faster you repay, and the higher the annualised cost, because the fee does not shrink.
How to convert any offer
Take the total you repay minus what you receive: that is the fee in euros. Estimate the months until it is repaid from your revenue and the percentage taken. Then use the rule that applies to any amortising credit: the annual rate is roughly the fee divided by half the advance, divided by the years to repay. For a €7,500 fee on €50,000 over 0.6 years: 7,500 divided by 25,000 divided by 0.6, about 50 percent. A spreadsheet's internal-rate function on the actual cash flows gives the precise figure; the rough rule is enough to see which offer is which.
When revenue-based financing fits
When the money earns more than it costs, quickly. An online shop buying stock for a season it knows will sell, a restaurant financing a refit before summer, a business with a signed order it needs to fund. The advantages are real: approval in days on revenue data alone, no fixed instalment in a slow month, usually no personal guarantee beyond a performance guarantee. The cost is worth paying when the alternative is missing the season. It is not worth paying for working capital that simply covers ongoing losses, because the percentage of revenue taken makes the losses bigger.
When a term loan fits
Whenever you have time and evidence. A term loan is cheaper by a multiple, predictable, and does not take a share of every sale. It suits equipment, vehicles, a second location, or any investment that pays back over years rather than months. The price of that cheapness is the bank's process: accounts or at least a solid track record, a personal guarantee, and weeks rather than days.
The small print that matters
Because revenue-based financing is a sale of receivables rather than a loan, consumer and most business credit rules do not apply. Read what happens if revenue drops sharply: some contracts extend the repayment, others allow the financier to demand the balance. Read whether early repayment reduces the fee; often it does not, which is the opposite of a loan. And read whether the financier takes its share directly from your payment processor, which is convenient until you want to change processor.
Summary
Compare the two on annual cost in euros, not on a factor against an interest rate. Use revenue-based financing for fast, short, high-return needs where speed is the point. Use a term loan for everything that can wait a few weeks. And if the annual cost of the fast money exceeds the return on what it buys, it is not financing; it is a loss.
