A revenue-based financing offer is one of the easiest term sheets to misread, because the headline number is designed to be misread. "A 10% fee" sounds like a 10% cost of capital. It isn't — and the gap between what it says and what it costs is the most expensive misunderstanding on a growing brand's P&L. So let's do the arithmetic in full, on a clean $1,000,000 advance, and leave nothing in the footnotes.
The offer, as quoted
Take a representative advance, of the kind a brand doing seven figures a month is offered routinely:
| Amount advanced | $1,000,000 |
| Fee (factor) | 10% |
| Total to remit | $1,100,000 |
| Quoted "cost" | $100,000 (10%) |
| Collection | ~15% of daily sales until remitted |
Ten percent. Cheaper than the equity you'd dilute, cheaper than the headline on most cards. That is the number that closes the deal. It is also not the cost of the capital.
Why 10% isn't 10%
The error is simple: you never hold the $1,000,000 for a year. From day one, the daily remittance pays the balance down. By the time you've had the money a few months, you're using a fraction of it — but you're paying the full $100,000 fee for the whole period. The cost has to be measured against the capital you actually had, over the time you actually had it.
On a roughly six-month payback, the balance declines steadily from $1,000,000 toward zero, so your average outstanding balance is about $500,000. You paid $100,000 for the use of ~$500,000 over half a year. That is an effective annualized cost of roughly:
Compute it the rigorous way — the internal rate of return on the actual monthly cash flows — and you land in the same place: about 41% effective APR on a six-month payback. The "10% fee" is a 41% cost of capital. Independent analyses of the category put RBF flat fees in a 28% to 56%+ effective-APR range, exactly where this arithmetic lands.1
Advance $1.0M at t₀; remit $1.1M in equal monthly instalments over the payback period; solve for the rate that sets the net present value to zero (IRR), then annualize. Six equal monthly remittances of ~$183,333 imply a monthly IRR of ~2.9%, i.e. ~41% annualized. Daily remittance pushes the figure marginally higher; a larger fee or faster payback pushes it higher still.
The perverse part: the healthier you are, the more you pay
Because the fee is fixed but the time is not, the effective rate is governed entirely by how fast you repay — and how fast you repay is governed by how well you're selling. The stronger your sales, the faster the daily debit clears the balance, and the higher your annualized cost. The brands that perform best are charged the most.
| Payback period | Monthly remittance | Effective APR |
|---|---|---|
| 4 months (strong sales) | $275,000 | ~60% |
| 6 months (base case) | $183,000 | ~41% |
| 9 months | $122,000 | ~27% |
| 12 months (slow) | $92,000 | ~20% |
Only the slowest-paying brand — the one whose sales disappoint — ever approaches the "20%" that these products are sometimes marketed near. Perform well, and you pay 40–60%.
The costs that never reach the term sheet
The effective rate is the part you can at least calculate. These are the parts that don't show up as a number at all, and they are routinely reported across the major providers.2
| Owed in full, regardless | The $1,100,000 is due whether the cohort you funded performs or not. There is no performance contingency — the "revenue share" rides on top of a fixed obligation. |
| A blanket lien | A UCC-1 filing against all your business assets. Your next bank line or credit facility sees it — and can decline you because of it.2,3 |
| The daily drain | At ~15% of sales, roughly $180,000 a month leaves your account before you can deploy it into the next cohort or inventory. Some states are now moving to ban automatic debits outright.4 |
| A weekly floor | The "flexible percentage" is overridden by a weekly minimum in slow weeks — flexible only upward, fixed exactly when you need slack.2 |
| Refund clawback | A customer returns an order you already paid the revenue share on; you don't get that share back.2 |
Add them together and the honest description of the product is not "performance-linked capital." It is a secured, fixed-fee advance against your entire business, with a ~40% effective rate and a daily debit — much closer to the merchant cash advance it was built to replace than to the aligned capital it markets.
The same $1,000,000, priced on the cohort
Here is the structure we'd put against it — and here is where we are going to be more honest than a term sheet usually is, because the comparison is not a clean sweep, and pretending otherwise would make us no better than a "10% fee" headline.
Our version: we deploy the $1,000,000 into the cohort, collect 55% of that cohort's gross profit as it arrives, and stop permanently at a hard cap of 1.30× — $1,300,000. It is non-recourse: no lien on your business, no daily debit, no fee owed if the cohort disappoints. Now watch what that does across outcomes, measured as the brand's net result per $1,000,000 deployed.
| Cohort outcome (lifetime GP) | RBF · 10% fee | Cohort Capital · 55% / 1.30× |
|---|---|---|
| Weak — $1.0M (1.0× GP/CAC) | −$100,000 | +$450,000 |
| Break-even line — $2.0M (2.0×) | +$900,000 | +$900,000 |
| Strong — $3.0M (3.0×) | +$1,900,000 | +$1,700,000 |
| Home run — $4.0M (4.0×) | +$2,900,000 | +$2,700,000 |
Brand net = (financing received) − (CAC spend) + (cohort gross profit) − (paid to provider). RBF pays a fixed $1,100,000. Cohort Capital pays the lesser of 55% of gross profit or the $1,300,000 cap. The two structures cross exactly at $2.0M of cohort gross profit, where 55% equals the RBF remittance.
Read it fairly. Above roughly 2.0× gross-profit-to-CAC, the flat fee leaves the brand with about $200,000 more — because our profit share, until it hits the cap, takes a larger bite of a winning cohort. On your biggest winners, a flat fee is cheaper. We'll say that plainly.
But look at the other row. On the cohort that misses — and across any real book, some always do — the flat fee turns a soft outcome into a $100,000 loss the brand has to fund out of its other revenue, with the lien still attached. The capped, non-recourse structure leaves the brand $450,000 to the good and absorbs the shortfall itself. The same structure that costs you a little of the upside is the one standing in front of the downside.
A revenue-based advance charges you the same whether the cohort wins or loses. A capped, non-recourse purchase charges you more only when you're winning — bounded by a cap — and protects you when you're not. You cannot know in advance which cohorts will be your 3× winners and which will miss. Pricing as if every cohort is a home run is exactly how a fixed fee becomes a fixed loss.
So which is actually cheaper?
The honest answer: it depends on an outcome you don't yet know. If you were certain every cohort would clear 2.5× and pay fast, a flat fee would save you money — and you should take it. That certainty doesn't exist. What you can choose is the shape of the cost: a fixed obligation that's cheapest precisely when you needed protection least, or a capped, performance-shared cost that's there in the outcomes that actually threaten the business.
What is not in dispute is the part the term sheet hides: the "10% fee" is a ~40% effective rate, it's owed in full regardless, it's secured against everything you own, and it debits you daily. Whatever you decide, decide it against those numbers — not against the headline.
Send us the cohort and the advance you're weighing, and we'll show you the side-by-side across outcomes — capped, non-recourse, and priced on the cohort.
Start a cohort reviewSources & notes. 1 RBF effective-APR range (~28–56%+) and the flat-fee-masks-APR dynamic: ask-luca.com, "Revenue Based Financing for Ecommerce" (2026). 2 Reported RBF contract terms — UCC-1 blanket liens, weekly minimum floors, refund clawbacks: ask-luca.com (2026). 3 UCC filing as a secured claim on business assets (distinct from a personal guarantee): ask-luca.com working-capital guide (2026). 4 Texas HB 700 prohibition on automatic debits (eff. Sept 1, 2025): Mayer Brown (2025). The $1M advance, 10% fee, and ~15% holdback are a representative illustration, not any specific provider's quote; competitor terms vary and change. All Cohort Capital figures are illustrative of a model base case and not an offer, quote, or commitment to fund. This piece is informational and not legal, tax, investment, or accounting advice.