Hypothetical scenario
Scenario: Scaling Without Strings Using Debt Instead of Equity
Short answer
In this invented example, a software company with steady subscription revenue needs $300,000. A 1.4x revenue-based deal costs $120,000 and works out to about 46% APR if repaid in 18 equal months or about 23% over 36. A three-year bank loan at 10% with a $3,000 fee costs about $48,500 in interest, about 10.7% APR. Equity has no payments but gives up a share of future value and some control.
Key points
- "Without strings" usually means without giving up ownership; debt has its own strings: payments, covenants and sometimes guarantees.
- A fixed payback cap gets more expensive per year the faster the company grows.
- Bank debt is cheapest when the company qualifies; recurring revenue and profitability are what qualify it.
The situation
A seven-year-old software company sells a subscription tool to accounting firms. Monthly recurring revenue is about $80,000, churn is low and the company is modestly profitable. The founders want $300,000 to hire three engineers and a salesperson, and they don't want to sell part of the company.
Three options, priced on assumptions
| Sell equity | Revenue-based financing | Bank term loan | |
|---|---|---|---|
| Money in | $300,000 | $300,000 | $300,000 (less a $3,000 fee) |
| What it costs | A share of the company, permanently | Repay 1.4x = $420,000 from a share of revenue | 10% interest over 36 months |
| Monthly payment | None | Varies with revenue | $9,680.16 |
| Total cost | Depends on what the company becomes | $120,000 | about $48,500 interest + $3,000 fee |
| Estimated APR | n/a | about 46% (18 months), 35% (24), 23% (36) | about 10.7% |
| Strings attached | Investor rights, board seats possible | Revenue reporting, possible minimums, liens | Covenants, reporting, likely a personal guarantee |
The revenue-based APRs assume equal monthly payments; real payments follow revenue.
How the founders reason through it
- Can the company carry $9,680 a month? With modest profits and $80,000 monthly revenue, the bank payment is manageable if the new hires don't delay revenue for long. They check the DSCR with a slower-growth case.
- Growth speed cuts both ways. If the hires work, revenue-based financing is repaid quickly and its yearly cost rises toward the top of the range. If growth is slow, its payments shrink, which is safer for cash, but it lingers.
- Equity is cheapest only if the company doesn't grow. For a company confident in its growth, giving up a share of future value is usually the most expensive capital over time.
- The bank's strings are real. Covenants on minimum cash or coverage, regular reporting and a guarantee from the founders.
A possible structure
The founders ask their bank for a smaller term loan, $200,000, and fund the rest by delaying one hire until revenue from the first two arrives. That keeps the cheapest money in the mix and avoids both dilution and a high-APR product.
The reasoning to take away
No option is free of strings; they're just different strings. Pricing each in dollars and APR, and naming its non-price conditions, makes the trade-off visible.
Sources
Checked November 9, 2026. Program rules and scoring models change; the source is the authority.