Revenue Based Financing Agreement Template for Canada

A Revenue Based Financing Agreement is a specialized legal document that structures an alternative financing arrangement where you receive upfront capital in exchange for committing a percentage of your future revenue to the financing provider until a predetermined total is repaid. Unlike traditional loans or equity investments, this financing model aligns your payment obligations directly with your business performance, making it particularly attractive for companies with strong revenue growth potential but irregular cash flows.

When do you need this document?

You need a Revenue Based Financing Agreement when seeking growth capital without giving up equity ownership or taking on traditional debt obligations. This financing structure is ideal if you operate a SaaS company, e-commerce business, or subscription-based service with predictable recurring revenue streams. Many Canadian startups and scale-ups use revenue-based financing to fund marketing campaigns, inventory purchases, equipment acquisitions, or geographic expansion. The agreement becomes essential when you want to maintain control over your business decisions while accessing capital that scales with your revenue performance. You'll also need this document if traditional bank financing isn't available due to limited collateral or if you want to avoid the lengthy due diligence process typical of equity funding rounds.

Key legal considerations

The most critical aspect of your Revenue Based Financing Agreement is ensuring the payment structure doesn't violate Canada's criminal interest rate provisions under Section 347 of the Criminal Code, which caps annual interest rates at 60%. You must carefully structure the revenue percentage and payment cap to avoid classification as criminal interest. The agreement should clearly define "Revenue" to prevent disputes over what income streams are included in the calculation. Payment mechanics must specify monthly or quarterly payment schedules, reporting requirements, and procedures for revenue verification. Your agreement should address default scenarios, including what constitutes a material adverse change and the financing provider's remedies. Consider including provisions for prepayment options, as paying off the agreement early can significantly reduce your total cost of capital.

Legal requirements in Canada

Under Canadian law, your Revenue Based Financing Agreement may be classified as a security under provincial Securities Acts, potentially triggering disclosure and registration requirements depending on the specific terms and parties involved. You must ensure compliance with the Income Tax Act regarding the deductibility of payments and proper classification of the financing arrangement for tax purposes. If your agreement involves personal information collection and sharing, you need to comply with PIPEDA (Personal Information Protection and Electronic Documents Act) for data handling procedures. The agreement must align with your provincial Business Corporations Act regarding corporate authority and director approval requirements. Consider whether the financing provider requires personal guarantees from directors, as this creates additional liability considerations under provincial guarantee legislation. Your agreement should also specify governing law and jurisdiction for dispute resolution, typically choosing the province where your business is incorporated or primarily operates.