How revenue-based financing can redefine credit, boost SME lending

As banks and private lenders grapple with rising non-performing loans (NPLs), stricter regulations, and evolving borrower profiles, traditional methods are proving inadequate.

Revenue-based financing (RBF) offers a credible alternative to this collateral-dependent system, especially when combined with insurance and credit guarantees.

At its core, RBF enables lenders to provide capital in exchange for a percentage of a borrower’s future revenues.

These payments are made periodically until an agreed-upon return is achieved. Repayments fluctuate with business performance, easing pressure during slow periods and accelerating recovery during peak seasons. Unlike fixed-term loans, RBF aligns repayment with cash flow. Unlike equity, it preserves ownership and control.

This structure makes RBF particularly attractive for businesses with recurring or predictable revenues, such as those in agribusiness, technology, climate solutions, healthcare, hospitality, and professional services. For lenders, it introduces a model where risk is shared rather than entirely transferred to the borrower.

Banks should view revenue-based financing not as a replacement for conventional lending, but as a tool to enhance their portfolios. By incorporating revenue-based products, they can extend credit to viable businesses with strong, verifiable cash flows but lacking traditional collateral.

Variable repayments reduce default risk during downturns, while flexible structures improve client retention and foster long-term relationships.

Technological advancements further strengthen the case for this model. Digital banking, point-of-sale integrations, and real-time revenue monitoring now allow lenders to more accurately track borrower performance, automate collections, and dynamically manage risk, moving beyond static financial statements and historical balance sheets.

To encourage regulated institutions to adopt revenue-based lending, the associated risks must be addressed. Insurance can significantly enhance RBF’s viability.

Revenue interruption insurance can protect lenders against income drops caused by external shocks like climate events or supply-chain disruptions.

Credit insurance can cover partial losses if borrowers fail before the agreed return is achieved. Portfolio-level insurance can smooth returns across multiple RBF transactions, making the model safer for lenders.

By transferring some downside risk to insurers, lenders can offer more competitive revenue-based products and expand access to credit without compromising prudential standards.

This represents a new underwriting opportunity for insurers, focused on performance risk supported by increasingly sophisticated business data, rather than static asset values.

Credit-guarantee mechanisms offer another powerful means for scaling RBF. Guarantees from development finance institutions, sovereign funds, or private guarantors can cover first-loss risk for banks piloting RBF products. This de-risks lending to priority sectors like agriculture and SMEs and improves capital efficiency under regulatory frameworks.

In practice, a bank could extend revenue-based financing to SMEs, supported by a partial credit guarantee and revenue interruption insurance. The result is a layered risk-sharing structure where borrowers, lenders, insurers, and guarantors are all aligned around performance, not just collateral.

Private lenders, such as fintechs, private debt funds, and alternative credit providers, have been quicker to adopt revenue-based models. Many already use it as a core strategy, efficiently recycling capital as repayments track revenue performance.

By partnering with insurers and guarantee providers, private lenders can responsibly scale ticket sizes, enter higher-risk sectors, and protect investor returns while offering founder-friendly capital.

However, the success of RBF depends on robust legal and regulatory foundations. Clear contractual definitions of revenue, transparent reporting mechanisms, proper regulatory classification, sound tax treatment, and enforceable insolvency protections are essential. Without careful structuring, RBF risks ambiguity. With it, the model becomes scalable and compliant.

Revenue-based financing, enhanced through insurance and credit guarantees, offers a blueprint for the future of credit in Kenya.

It allows capital to follow performance rather than collateral, supports productive enterprises, and distributes risk more intelligently across the financial ecosystem.

As lenders search for sustainable growth in a changing economy, the question is no longer whether alternative credit models work, but how quickly institutions can responsibly adapt them. The future of credit may lie not in abandoning traditional methods, but in re-engineering them using revenue, risk-sharing, and innovation to finance growth where it actually happens.

Cyrus Maina is an Advocate of High Court of Kenya and Managing Partner at CM Advocates LLP specialising in Hybrid Capital & Structured Finance (HCSF)