September 29, 2023
min read
Written by: 
Nikolaus Hilgenfeldt

Revenue-based vs Equity-based Financing - What’s the Difference?

In the electrifying world of ecommerce, two financing options beckon like contestants on a game show: "Revenue-Based Financing" vs. "Equity-Based Financing."

It's a high-stakes decision, and like any good game, each option comes with its own set of rules and prizes. Are you ready to play?

You're the star of the show, and your ecommerce business is the main event.

The million-dollar question is, "How do you finance your growth?"

Do you go for the dazzling instant cash of revenue-based financing or roll the dice for equity-based financing's long-term potential?

In this blog post, we'll highlight these two financing superstars, break down their strengths and weaknesses, and help you pick the perfect choice for your ecommerce journey. 

Let's begin!

What Is Revenue-based Financing?

Revenue-based financing is a relatively modern approach to funding, especially popular among startups due to its non-dilutive nature.

It allows businesses to secure capital based on their existing monthly or annual revenues.

The way it works is that investors claim a portion of the company's profits until you repay a predetermined sum.

This financing type differs from debt financing because there's no interest accumulating on the borrowed money and no fixed payment amounts.


The payments to the investor depend on how well the business is doing.

So, if your business makes more money, the payments to the investor go up, and if you make less, the payments go down.

It's a flexible arrangement that adapts to the company's income.

Unlike equity financing, where investors become owners of the business, revenue-based financing doesn't give the investor ownership rights.

That's why it's often seen as a mix between regular debt and equity financing.

What Is Equity-based Financing?

Equity-based financing involves raising capital by selling ownership shares (equity) in the business.

It is a common choice for startups and growing companies to secure the capital needed for expansion, research and development, hiring, marketing, and other business activities.

It can provide significant funds without requiring regular interest payments or collateral. Still, it involves sharing ownership and potential profit with investors.

Equity financing offers financial relief for the company, as it doesn't entail mandatory monthly payments, freeing up capital you can channel into business growth.


However, this doesn't imply that equity financing has no drawbacks, and those can be significant.

In reality, the trade-off is substantial.

To secure funding, you must allocate a portion of your company to the investor.

It means sharing profits and engaging in consultations with your new partners whenever you need to make decisions affecting the company.

The only means to part ways with these investors is through a buyout, which is likely to be more expensive than the initial capital they provided.

Revenue-based vs. Equity-based Financing – 4 Key Differences

Distinguishing between revenue-based financing vs. equity-based financing involves considering several critical factors that set these two financing approaches apart.

Let's delve into these distinctions in more detail:

1. How To Get It

Revenue-Based Financing (RBF)

You have a successful online store but need additional capital to expand the product line and invest in marketing campaigns. 

You strike a deal with an RBF investor who provides you with $100,000 in exchange for 10% of your monthly revenue until you reach a total repayment of $150,000. 

Here's how it works:

  • Month 1: Your revenue is $50,000, so you repay the RBF investor 10% ($5,000).
  • Month 2: Revenue increases to $60,000; your repayment is now 10% ($6,000).
  • The schedule continues until Month 10 when you reach the $150,000 cap.

In this situation, you retain complete ownership of your business, and your repayments are linked directly to your revenue, providing flexibility, especially during slower sales periods.

It's worth emphasizing, though, that the overall repayment amount may surpass the initial borrowing sum due to the revenue-sharing structure.

Equity-Based Financing

In contrast, equity-based financing allows companies to issue ownership shares, usually in the form of stocks.

The capital is raised by selling these shares, and the price of each share is typically determined by market demand and supply dynamics.

This method often involves dilution of ownership as new shares are issued.


For example, you are launching a cutting-edge ecommerce platform designed to revolutionize the tech gadget industry.

You pitch your business to venture capitalists, and they agree to invest $1 million in exchange for a 20% equity stake in your company.

 Here's what happens:

  • The VC firm becomes a shareholder with a 20% ownership stake.
  • You receive the $1 million investment, which you can use for various purposes like hiring top talent, product development, and marketing.
  • The VC firm becomes an active partner, providing guidance, connections, and expertise to help your company thrive.

2. Ownership Dilution

Revenue-Based Financing (RBF)

Businesses opting for RBF maintain full ownership rights and control of the company throughout the financing arrangement.

Investors receive a share of future revenue but do not acquire ownership stakes or voting rights.

Equity-Based Financing

Equity financing inherently involves dilution of ownership.

When a company issues new shares to raise capital, it increases the total number of shares outstanding.

Existing shareholders' ownership percentages decrease proportionally, which means they own a smaller piece of the company.

3. Investor Rights

Revenue-Based Financing (RBF)

Investors participating in RBF typically have limited rights.

Their primary entitlement is to receive a predefined percentage of the company's monthly or quarterly revenues. 

They do not possess voting rights or decision-making authority in the business.

Equity-Based Financing

In equity financing, particularly with common stocks, investors become company owners. 

Common stockholders have voting rights, allowing them to participate in key decisions and governance matters.

This ownership stake grants them a say in the company's direction.

4. Returns

Revenue-Based Financing (RBF)

RBF investors receive returns based on a percentage of the company's revenues.

Repayments are typically structured as a multiple of the initial investment, providing investors with a potential return that reflects the risk they assume.

The focus is on revenue-driven returns.


Equity-Based Financing

In equity financing, companies issue dividends to shareholders.

However, they are not obligated to pay dividends regularly, especially for common stockholders.

Instead, returns from equity financing primarily come from the appreciation in the value of shares over time.

Investors profit when the stock price increases.


Choosing the Ideal Financing Solution

Revenue-based Financing – Pros and Cons

You can raise capital without giving up ownership or voting rights.

✅ Repayments are linked to revenue, meaning you have lower repayment obligations during slower periods. 

RBF repayments are deducted from pre-tax earnings, reducing the overall tax liability and potentially increasing earnings per share.

❌ RBF can be more expensive in the long run due to revenue-based repayments.

❌ Short repayment terms can pressure short-term revenue growth over long-term planning.

Fluctuating revenues can make meeting RBF obligations challenging.

❌ Precise revenue reporting is crucial, adding administrative complexity.

❌ RBF investors typically offer less guidance and support compared to equity investors.

❌ Multiple RBF agreements can lead to a heavy financial burden.

❌ RBF terms can vary, requiring careful review and legal assistance.


Equity-Based Financing – Pros and Cons

✅ It suits businesses with high growth potential that require substantial capital injections. 

Equity investors often bring valuable expertise, connections, and mentorship.

✅ Equity financing doesn't involve regular repayments. You can reinvest profits without the pressure of servicing debt.

❌ Selling equity in your company can lead to reduced control and decision-making power.

❌ You'll need to share your business's earnings with investors, potentially decreasing your own financial gains.

❌ Investors' interests may not always align perfectly with yours. Conflicts can arise if investors have different visions or priorities for the company.

❌ It can lead to complex legal and governance issues, such as shareholder agreements and voting rights. 

❌ Equity investors often require regular financial reporting and transparency, which can be costly and time-consuming.

❌ Equity investors generally anticipate an exit strategy, like an IPO (Initial Public Offering) or acquisition, within a specified timeframe. 

Revenue-based vs. Equity-based Financing – Which Is Better for Ecommerce Businesses?

The choice between RBF and equity financing depends on your  business's specific circumstances:

✔️ RBF can be an excellent choice for stable, cash-flow-positive ecommerce businesses.

It provides capital without diluting ownership, making it suitable for businesses with predictable revenue streams. 

For instance, if you have a subscription-based ecommerce company, you can use RBF to scale operations while retaining ownership.

✔️ High-growth ecommerce startups often prefer equity financing. Startups with ambitious growth plans may need significant capital to enter new markets, develop products, or invest in marketing.

Equity investors can offer both funds and expertise to drive rapid expansion.

✔️ A balanced approach is an option for some ecommerce businesses. For instance, you may combine both financing methods: RBF for working capital needs and equity financing for substantial growth projects or strategic partnerships.

Revenue-based Financing vs. Equity-based Financing – What’s the Alternative?

While revenue-based and equity-based financing has merits, asset-based financing offers a compelling alternative.

It provides access to capital without diluting ownership or future revenue sharing.

You can secure funding, maintain control, and lower financing costs by leveraging your tangible assets.

Myos – Asset-based Financing For Ecommerce Sellers

Myos is a financial provider specializing in creating personalized solutions to help sellers achieve their business goals.

We offer a range of loans from €100,000 to €2,500,000, carefully designed to meet each client's unique borrowing needs.

What makes Myos stand out is our use of advanced AI technology. 

Simply provide us with your product's ASINs or EANs, along with your order scouting and fulfillment preferences, and we'll conduct an AI product check using open data to provide you with an offer within 24 hours!

Here are the advantages of choosing Myos:

✔️ Inclusive Accessibility: Myos is open to businesses of all sizes, even those as young as 2 months old, without requiring a minimum monthly turnover.

✔️ Risk-Free Financing: You can secure a loan from Myos without putting your personal assets or guarantees on the line.

✔️ Strategic Funding Period: Myos offers a dedicated 12-month window for you to develop and execute your strategic plan with our funding program.

✔️ Effortless Application Process: Myos provides a streamlined experience, ensuring funding approval within 72 hours.

✔️ Early Repayment Flexibility: Myos doesn't penalize you for early repayment; instead, we charge a monthly fee based on the remaining capital, avoiding fixed or lump-sum payments.

✔️ Tailored Payment Structure: Myos offers a flexible payment structure where the product score determines the fee, and early repayment reduces the payment. There are no extra costs for early settlement.


What Do You Need To Get Started With Myos?

To qualify for our funding, your business must meet the following criteria:

🏁 Registered Office: Your company should have a registered office in Germany, Austria, Cyprus, or the United Kingdom (UK), not a shell or shelf company.

🏁 Minimum Business Duration: Your company should have a minimum operational history of at least 6 months.

🏁 Ecommerce Presence: Your products should exhibit a sales track record in ecommerce for at least 50 days on platforms such as Amazon, eBay, online stores, or similar channels.


If your business fulfills these eligibility criteria, do not hesitate to explore the available opportunities with us. 

Are you interested to learn more?

Sign up today and receive a free, non-binding offer!


How Do RBF and Equity Financing Impact a Company’s Financial Structure?

RBF affects cash flow through periodic revenue-based repayments, while equity financing does not involve regular repayments but may dilute ownership.

Which Financing Option Is Better for Long-Term Growth?

The choice between RBF and equity financing depends on a company's specific needs and goals. RBF may suit businesses with stable revenues, while equity financing is ideal for high-growth ventures.

Are There Tax Advantages Associated with RBF or Equity Financing?

Revenue-based financing repayments are deducted from pre-tax earnings, potentially reducing the overall tax liability. Equity financing does not have this tax advantage but may offer other benefits.

Keep Learning

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Revenue-based Financing for Startups - Everything You Need to Know

8 Most Common Cash Flow Mistakes and Ways to Avoid Them

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