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Status: Draft
Author(s): Adam Saghy, Bharath Gowda, Mihaly Dallos
Created: April 2026

Summary

This proposal introduces a new loan product type in Apache Fineract tailored for small and medium-sized merchants seeking working capital. Unlike traditional installment-based loan products, this product ties repayment dynamically to the borrower's ongoing revenue stream, offering a transparent, flexible, and merchant-friendly financing model that diverges significantly from Fineract's existing loan product capabilities.

Motivation / Business Case

Small and medium-sized merchants regularly face cash flow constraints driven by the seasonal or unpredictable nature of their sales cycles. Traditional loan products with fixed monthly installments create financial hardship during low-revenue periods while failing to capitalize on high-revenue periods.

A Revenue-Based Working Capital Loan closes this gap by:

  • Basing loan eligibility and sizing on the merchant's proven transaction and sales history, rather than traditional credit scoring
  • Introducing a single transparent fixed fee agreed at origination, as an alternative to a periodic interest-based cost structure
  • Adjusting repayment amounts proportionally to incoming revenue, so repayments naturally slow down or accelerate with business performance
  • Removing the rigidity of fixed payment schedules and fixed maturity dates
  • Supporting loan terms ranging from a few months up to 2–3 years

Proposed Solution

New Loan Product Type: Working Capital Loan

A new dedicated loan product configuration is proposed, distinguished from existing Fineract loan products by the following pillars:

Pillar 1 – Fixed Fee (Non-Interest Cost of Borrowing)

  • The cost of borrowing is expressed as a single upfront flat fee, determined at loan origination
  • No periodic interest charges or APR-based amortization schedule
  • The fee remains constant regardless of repayment speed

Pillar 2 – Revenue-Based Repayment

  • Repayments are computed as a configurable fixed percentage of the borrower's periodic revenue
  • Repayment amounts are inherently variable, automatically rising with higher revenue and reducing during slower periods
  • An API must be designed and implemented to support modification of the repayment percentage during the loan lifecycle

Pillar 3 – Open-Ended Loan Term

  • No fixed maturity date is set at origination
  • The loan concludes once the total outstanding balance (principal + fixed fee) is fully settled
  • This requires a new approach to Effective Interest Rate (EIR) calculation, as the standard schedule-based EIR method is incompatible with a variable repayment timeline

Pillar 4 – Minimum Repayment Checkpoints

  • A minimum repayment threshold must be satisfied within defined review windows (e.g., X% of outstanding balance every N days)
  • Failure to meet the threshold triggers delinquency and collections workflows
  • Requires enhancements to existing collections programs such as Breathing Space and Re-Age to support this product's specific checkpoint-based delinquency model

Pillar 5 – Flexible Early Settlement

  • Full early repayment is supported at any time without additional penalty
  • Requires credit balance refund support and chargeback handling

Key Technical Components

Loan Product Configuration Parameters

Parameter

Description

repaymentPercentage

% of merchant revenue deducted per repayment event

fixedFee

Single flat charge applied at origination

minRepaymentThreshold

Minimum % of outstanding balance per checkpoint

maxLoanAmountFactor

Multiplier applied against historical revenue for sizing

EIR Calculation Engine

  • EIR is estimated at origination using projected repayment timelines based on historical revenue
  • Actual EIR is recalculated dynamically as real repayments are received, compared against initial disclosure
  • A dedicated batch job foundation supports this ongoing recalculation
  • EIR breach management logic handles scenarios where actual EIR diverges materially from disclosed EIR

Collections & Delinquency

  • Delinquency rules are checkpoint-based, not missed-installment-based
  • Extensions of existing collections programs adapted for this product model

Impact on Existing Fineract Modules

Module

Nature of Impact

Loan Product

New product type flag and configuration schema

Repayment Schedule

Variable/event-driven schedule engine

EIR Calculation

New variable-term EIR method + batch recalculation

Accounting

New transaction types for revenue-based repayment events

Collections

Checkpoint-based delinquency triggers and program extensions

Out of Scope

  • Automated underwriting and eligibility scoring engine
  • Direct integration with payment processors or transaction platforms
  • Merchant-facing dashboards or portals

Summary

A working capital loan is a short-term loan that businesses use to cover day-to-day operational expenses, not long-term investments.

  • Short-term (a few months up to ~1–2 years)
  • Linked to revenue
    • Cash based accounting 
    • Repay as a percentage of daily sales
  • No interest, but rather origination fee
  • Amortization based on Effective Interest Rate

Status

Under discussion / under design

Who is Involved

Background/Motivation

  • Loan management so far was targeting solely end customers, but loan management should provide products for businesses / merchants, where the requirements might be different
    • Like: Revenue based, open-ended, fixed fee loans

Goals and Exclusions

Change Proposed

Alternatives Considered

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