Financing a Custom Software Shop: SBA Loan or Revenue-Based Capital

A revenue-based financing provider is underwriting a repeatable pattern: predictable monthly revenue it can collect a percentage of. A dev shop with three active client engagements and irregular milestone billing doesn't produce that pattern, so providers either decline, price it much higher to offset the unpredictability, or ask for a minimum revenue history that a young shop doesn't have yet. If your firm has moved toward retainer-based ongoing engineering support for a handful of anchor clients, that recurring slice looks more financeable than the project work does, and some providers will finance against just that portion.

An SBA 7(a) loan is priced on your creditworthiness and the business's overall financial picture rather than the shape of your revenue, with rates capped by loan size, from 13.25 percent on the smallest loans down to 9.75 percent on loans over $350,000¹. That makes it a better fit for financing the gap between signing a large contract and its first milestone payment, or for hiring ahead of a signed statement of work when you need engineers on staff before the client's cash arrives.

The tradeoff is timing: SBA underwriting takes weeks, so it works for a gap you can see coming, not one that's already happened.

Neither SBA loans nor revenue-based financing is usually built for the most common dev-shop problem, which is a completed milestone sitting unpaid on a client's 45 or 60-day payment terms. Invoice financing, advancing cash against a specific unpaid invoice rather than your overall revenue pattern, is often a closer fit for that exact gap, and it's worth pricing against both before defaulting to either one. It also doesn't require the multi-year commitment an SBA loan does or the ongoing revenue share a revenue-based structure does.

A dev shop with two or three clients making up most of its revenue is a harder underwrite for every option, since a single client delaying payment or ending an engagement swings the numbers dramatically. Lenders will ask directly about client concentration, and being upfront about it, along with a plan for diversifying the client base, tends to go further than hoping the question doesn't come up. If your firm is early enough that concentration is unavoidable, a smaller SBA loan against your personal credit and a clear use of proceeds is often easier to get approved than revenue-based financing that a provider can't confidently model.

Say you've just signed a $400,000 fixed-price contract and need to hire two engineers before the first milestone pays out in six weeks: that's a known, dated gap that a short-term working capital loan or line of credit is better suited to than an SBA loan, which may not close in time. Say instead you're trying to build a retained managed-services line on top of your project work and want capital to fund the transition without slowing project delivery: that's closer to what revenue-based financing against your growing recurring revenue is built for, once that recurring line is large enough to underwrite on its own.

Any of these three routes gets easier once you can show a lender a handful of things: signed contracts or statements of work rather than verbal commitments, a clear breakdown of fixed payroll versus contractor labor, and a history of collecting on invoices within your stated terms. A dev shop that pads its financials with optimistic pipeline instead of signed work tends to get declined or repriced once underwriting digs in, so it's worth assembling that documentation before you apply rather than scrambling once a lender asks for it.

Owner credit still matters for an SBA loan even when the business's numbers are solid, since a personal guaranty is standard on nearly every SBA 7(a) loan regardless of the borrowing entity's structure.

Have these ready before any lender conversation:

• Signed contracts or statements of work, not verbal commitments or hoped-for pipeline, since lenders discount financials padded with unsigned work.
• A clear breakdown of fixed payroll versus contractor labor, so the lender can see which costs flex with project volume.
• A record of collecting invoices within your stated payment terms, which shows that milestone billings actually turn into cash.
• A candid summary of client concentration and your plan for diversifying, because lenders will ask directly and openness tends to help.