Revenue-based Financing

With a typical loan, you receive a set amount of money and pay a set amount back in regular installments. At the end of the loan's term, you've returned the principal, plus whatever interest you agreed to.

You borrow $1,000 from your brother for mime classes. You're going to pay him back over the course of a year, with 20% interest (20% interest; yikes...but, to be fair, your brother really hates mimes). You'll end up paying $1,200 by the end of the year, divided by 12 months, or payments of $100 a month. The key here is that you owe a set dollar amount per month. No matter what. Even if you can't earn anything from miming in the subway, you'll owe that $100 each month.

A revenue-based loan doesn't have a set dollar amount. Instead, you pay a predetermined proportion of your revenue to cover the loan. So...you don't promise your brother you'll pay $100 a month. Instead, you'll pay him back 25% of any money you earn from miming. If you work a street corner and get $12 thrown into your hat at the end of a performance, you'll hand over $3 to your brother as partial payment for the loan.

Revenue-based financing is helpful for growing businesses in cases where it isn't clear what a manageable debt load would be. The payments might start off small, when revenues are small, and get bigger as the company grows and is better able to handle high payments.

Some student loans are moving toward this model as well. Instead of a flat amount, the loan collects a certain percentage of income from the former student for a set period of time.