Latest / Franchise Conversations with Fexingo: Buying, Running, and Scaling Franchise Businesses / How Franchisees Use Revenue-Based Financing to Grow
Transcript
- Lucas: Let's talk about how franchisees are funding growth without taking on a traditional bank loan or giving up equity. I've been looking at something called revenue-based financing, and it's quietly becoming a go-to for multi-unit operators. Luna: Revenue-based financing — that's where the repayment is a percentage of monthly revenue, right? So if you have a slow month, you pay less? Lucas: Exactly. Instead of a fixed monthly payment, the lender takes a slice of your top line — typically somewhere between two and eight percent of gross revenue — until a pre-set repayment cap is hit. So the payment flexes with your cash flow. Luna: That sounds a lot more forgiving than a standard term loan. But I'm guessing the cost of capital is higher to compensate for the lender's risk? Lucas: It can be. A typical revenue-based deal might have a repayment cap of one point three to one point six times the advance. So if you borrow four hundred thousand dollars, you might end up paying back between five hundred and twenty thousand and six hundred and forty thousand. That's an effective APR that can range from twenty to forty percent depending on how fast you repay. Luna: Okay, so it's expensive. But for a franchisee who can't get a conventional loan — maybe because they're early in their multi-unit journey or have a lot of seasonal variability — it might be the only option? Lucas: Right, and that's exactly the profile I've been seeing. Let me give you a concrete example. There's a Subway franchisee in Ohio — let's call him Mike — who owned three locations and wanted to buy two more. His existing units had solid gross margins, around sixty-five percent, but his cash flow was lumpy because of seasonality around college semesters. Luna: Right, Subway near a campus. Spring break, summer, winter holidays — big swings. Lucas: Exactly. He went to a few banks and was offered SBA loans, but the fixed monthly payments would have been tight in the slow months. Then he found a revenue-based lender that specialized in franchise lending. They advanced him four hundred thousand dollars at a repayment cap of one point five times, with a monthly remittance of six percent of gross revenue. Luna: So he'd pay back up to six hundred thousand total, but only when revenue was flowing. That gives him breathing room. Lucas: He used that to buy the two existing Subway units, renovated both, and within eighteen months his combined revenue had grown enough that he repaid the full cap in about twenty-two months. The effective APR ended up around thirty-two percent. That's high, but he calculated that without those two stores, his lost incremental profit would have been far higher. Luna: So it's basically a bet on growth — you pay a premium for flexibility, but if the investment works, the math can still be positive. Lucas: That's the core argument. And it's not just Subway. Franchisors are increasingly partnering with revenue-based lenders as a way to help franchisees expand without the friction of traditional underwriting. The International Franchise Association has noted a rise in these partnerships over the last few years. Luna: Are there any particular types of franchises where this model works best? Lucas: Typically, concepts with high gross margins and predictable recurring revenue. Quick-service restaurants, cleaning services, home healthcare — businesses where fifty to seventy percent of each dollar is gross profit. Because the lender is taking a percentage of revenue, not profit, you need enough margin to service that payment and still have cash left over for operations. Luna: So if your gross margin is thin, like in grocery or gas stations, the math gets ugly fast. Lucas: Right. A franchise with thirty percent gross margin would be squeezed. The lender's cut eats into an already narrow profit pool. That's why most revenue-based lenders have minimum margin requirements — they won't even look at you if your gross margin is below forty percent. Luna: Interesting. So the lender is essentially underwriting the strength of the unit economics, not just the franchisee's personal credit score. Lucas: Exactly. It's a fundamentally different underwriting philosophy. They look at point of sale data, historical revenue trends, and average daily transactions. They're less concerned about your personal FICO score or collateral. For a franchisee who has strong operations but maybe a past credit hiccup, that can be a game-changer. Luna: But what about the risk of over-leveraging? If you take on revenue-based financing and then your revenue drops — say a new competitor opens nearby — you're still paying six percent of whatever's coming in. That could be painful if revenue falls off a cliff. Lucas: That's the trade-off. The payment scales down, but it never goes to zero. If revenue drops by half, your payment drops by half, but you're still paying. And unlike a term loan, you can't just skip a payment. The lender has a direct claim on your revenue stream, usually through an automatic clearing house agreement. Luna: So it's not a panacea. It's a tool for a specific situation — growth with lumpy cash flow and high margins. Lucas: Exactly. It's not meant to replace conventional debt. It's an alternative for that gap where a franchisee can't get bank financing or doesn't want to dilute equity. And it's been growing fast. According to data from the Small Business Finance Association, revenue-based financing for franchisees grew by about twenty-four percent year-over-year in 2025. Luna: That's significant. And with interest rates still elevated in mid-2026, I can see why franchisees are looking for flexible options. Lucas: Absolutely. The federal funds rate has been sitting at five and a half percent for a while now, and traditional small business loan rates are often prime plus three to five. So you're looking at nine to eleven percent on an SBA loan. Revenue-based financing is more expensive, but the flexibility can be worth the premium if it means you can seize an opportunity you'd otherwise miss. Luna: Speaking of seizing opportunities — that's actually a good moment to mention something. We run this show completely ad-free. No sponsors, no commercials, no annoying mid-roll interruptions. And that's a choice we've made from day one because we think the content should speak for itself. Lucas: Yeah, and the way we keep it that way is through listener support. If you've gotten any value out of these episodes — maybe a specific insight that helped you negotiate a lease or evaluate a financing option — and you'd like to support the show staying ad-free, there's a simple way. It's buy me a coffee dot com slash fexingo. Luna: No pressure at all. Just know that every contribution goes directly into keeping this independent and focused on what matters: practical, actionable franchise insights. Alright, back to revenue-based financing. Lucas: So where is this headed? I think we'll see more franchisors creating their own captive revenue-based lending programs. Already, companies like 7-Eleven and Dunkin' have in-house financing arms that use similar models. And as more data becomes available, underwriting will get more precise, potentially lowering costs for franchisees with strong track records. Luna: That would be a win-win. Lower cost of capital for the operator, and a more predictable return for the lender. Lucas: Exactly. For now, if you're a franchisee looking to scale, it's worth at least understanding the model and running the numbers. The key question is: can the incremental profit from the new units outweigh the cost of the financing? If yes, it might be the right move. Luna: And if the answer is no, then maybe it's better to wait and build more cash reserves. Either way, it's good to have another tool in the kit. Lucas: Right. One more thing — before you sign anything, ask the lender for a full amortization schedule under different revenue scenarios. Some lenders will show you the effective APR based on your actual projected payback period. Others won't. You want to see the worst case, the base case, and the best case. Luna: That's solid advice. And then compare that to the cost of equity — what percentage of your business you'd have to give up to raise the same amount. Often, revenue-based financing ends up being cheaper than selling even a small stake. Lucas: Especially if your business is growing fast. The cost of equity can be incredibly high when you factor in future upside. Revenue-based financing lets you keep all the equity, even if you pay a premium on the debt side. Luna: Alright, so that's revenue-based financing in a nutshell. A flexible, expensive, but potentially powerful tool for the right franchise scenario. Lucas: And if you're considering it, do your homework on the lender. Check how many franchise deals they've done, talk to other franchisees who've used them, and read the fine print on the ACH terms. Some lenders are more aggressive than others if you hit a rough patch. Luna: Good note to end on. Thanks, Lucas. Lucas: Thanks, Luna. That's it for this episode of Franchise Conversations with Fexingo.