Revenue-based financing, also known as royalty-based financing, is a financing model in which businesses secure capital from an investor in exchange for a portion of the business’s monthly revenues. Usually, this amount will be a fixed percentage of the business’s revenues.

Naturally, that means that the business will pay more on months when generated revenues are higher, and less when revenues dip. This makes revenue funding optimal for business owners with strong—but fluctuating—gross revenues, or those with highly predictable revenues.

Before we delve further into the pros, cons, and eligibility requirements of revenue-based lending, let’s look at the differences between revenue loans and equity or debt-based loans.

As mentioned above, revenue financing differs from both equity financing—including venture capital, growth capital and angel investing—and debt financing in notable ways.

Unlike traditional debt financing loans, which typically require fixed monthly payments and a set interest rate, revenue-based investing doesn’t accumulate interest. While the amount you’ll repay for a revenue loan may vary month to month, the percentage you’re paying won’t.

Funding that you receive from venture capitalists or private equity or angel investors, meanwhile, will entitle those investors to partial ownership. Equity financing offers the advantage of a lack of monthly payments, but it also means that you’re committed to forfeiting a portion of your equity, and therefore perhaps forfeiting some of your control over your business.