Revenue-Based Funding: another new approach to funding business is Revenue-Based Funding. The idea is that instead of the risk being attached to the capital growth of the investment, the lender takes a risk on the revenue, by charging a percentage of the top line.
My first business made use of this back in 1982. We just happened to start at a very low ebb of the British economy (the worst time since the Great Crash) and the bank we chose to work with introduced a short-lived experiment to increase small business lending in a dull market. We were actually the benficiaries, since our sales came in below forecast over the loan period. It could of course, have gone the other way, but we would have had the money to cover it.
A US company called RevenueLoan now offers a Revenue-Based Funding product, but on relatively large amounts for startups. As they say, “Revenue Based Financing (RBF) is a hybrid financing method that fills a need in the growth capital market for companies with approximately $1 to $10 million in revenue and a proven plan for growth.
Instead of requiring a business to pay a fixed amount and over a fixed amount of time (i.e. think of your typical bank loan), an RBF investment receives a fixed percentage of gross revenues, up to some negotiated “cap” (anywhere from 1.25x for a short term, on up, depending on the needs of the company, and the timeframe and risk factors).”
Their criteria are
- Revenue run rate of $1 M or more
- Gross margins of 50% or higher
- Solid plan for use of funds with near-term return (“money machine”)
- Can use $100k to $500k in funding immediately.
Revenue-Based Funding has advantages and disadvantages for the young venture, as it does for investors, but prima facie, it’s appealing to both.
Thanks to Thomas Thurston of Growth Science International for the picture of relative risk and reward for investors of various kinds of finance and the companion one below, seeing the alternatives from the entrepreneur’s perspective.
Another Revenue-Based Funding business is Next Step Capital Partners, based in Austin, Texas. The company was created to help small businesses with exciting opportunities for growth. By bringing a previously underutilized and innovative investment structure, partners Patrick Drew and Dan Keelan help companies across the state of Texas take their business to the next level.
Their approach means that repayment of the investment amount, plus an agreed-to return, is sourced solely from your company’s topline revenue. Payments are never fixed. As sales and revenue increase, the investment is paid off more quickly. If sales are lower than initially forecasted, your payments to us are reduced in kind.
A Boston-based fund, Arctaris provides capital to private and publicly held expansion stage companies seeking $1-5 million, or up to $50 million through syndication. They use both subordinated debt (ranking after other debts, should a company fall into receivership or be closed) and a royalty security in which an investment is made in exchange for a percentage of a company’s revenue for a predefined length of time.
You might also want to try Lighter Capital, a newer funder–based in Seattle, WA.
They created offer a light-weight and flexible financing option with entrepreneur-friendly terms. With no dilution, no loss of control, and no fixed repayment schedule, entrepreneurs can stay focused on growing their businesses. Their model is best suited for companies that are currently generating at least $120,000 in annual revenue. Pre-revenue startups can still apply online so that they can keep you on their radar
They lend $25k-$500k in capital and the monthly loan payment is based on a percentage share of monthly top-line revenue. If revenues drop, so do payments. This is ideally suited for early-stage companies that are generating sales, but need additional capital to take full potential of their opportunities and grow as fast as possible.
The loan is usually terminated when a predefined total repayment cap is reached, and we target a 1 to 5 year payback term. If revenues grow faster than plan, the loan is paid back a little faster; if they are slower, then payback is slower.
On Deck Capital makes loans of $5,000-150,000 over 3-18 months, based on a strong cash flow and good payment behavior that demonstrate business performance, but they are not available to new startups, as you have to have been in business for at least a year. They value cash flow over credit scores. So often fledgling businesses may be going like gang busters, but the owners have disappointing credit scores. This company rates the business, rather than the individual’s history.
But beware, repayments are made daily via the Automated Clearing House and On Deck demands the security of a personal guarantee and sometimes a lien on the assets of the business (not real property or personal assets).