Wednesday, December 15, 2010

Revenue-Based Financing: An Illustration

Okay, sorry, I got a late start today. But, since I promised, here I am with the revenue-based financing illustration and comparison table.

Comparison Table

SMALL BUSINESS LOAN (Bank financing)
 REVENUE-BASED FINANCING (Royalty financing)
  •  Lending based on APR (Annual percentage rate)
  •  Lending based on a CAP (NOT  an acronym)- sum of total repayments as a multiple of the principal
    •  APR is typically 7-18%. Total annualized repayment will be 50-80% over a 5-7 amortizing year loan.
    •  The royalty on monthly gross revenue is usually 2-10%. The cap is typically 2x - 5x the original/principal investment.
  • For term loans, bank loans have a specified monthly payment.
  •  The monthly payment is based on gross revenue and therefore fluctuates as gross revenue does.
  •  Typically, has strong covenants which are minimum performance measurements contained in the small business loan documents that, if unmet, trigger a loan default.
  •  Typically has very light covenants.
  •  Requires business or personal assets pledged as collateral for the bank loan.
    • Often requires a personal guarantee by one or more of the business' owners.
  •  May require collateral. Will often accept intangible assets (i.e., intellectual property) as collateral when required.
    • Carries no personal financial liability.


Seth W. is the founder, CEO, and majority owner of a up-and-coming marketing company. The firm is cash flow positive. Seth has the opportunity to purchase a marketing software system that will enable his company to expand quickly with minimal bodies. He approached his bank. They like him but his firm has only been in operation for 2 years, has no real tangible assets, and has revenue that varies widely from month to month. (The company primarily gains customers via periodic conferences.) So the bank VP says, "Sorry, we'll keep an eye on you for the future but there's nothing we can do now."

Seth recently read about revenue-based financing and thinks it may be a good fit for his firm. He has his CFO investigate. She finds a firm that's willing to invest at 8% of gross revenues to be repaid over a 5-year period. Seth's firm takes an investment of $150,000 with a cap of 3x revenue - or $450,000 repaid over the term.

Summary: Seth's firm repays a lot more than it would have with a bank loan. However, the overall terms provide the flexibility his company needs with no dilution of his equity. So this option is great for his firm at this stage.

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