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