Comparison Table
SMALL BUSINESS LOAN (Bank financing) | REVENUE-BASED FINANCING (Royalty financing) |
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Illustration
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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