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A Revenue-Based Loan Product for Main Street

Mar 17, 2021

For small and medium sized companies looking for capital to grow or restart their businesses, funding options can be hard to come by. Banks can be slow and rigid when it comes to making loans. Venture capital firms mainly focus on high-growth industries and companies that can achieve near-term exits on their investments. Many of the non-bank lending options narrowly target businesses with subscription revenue models, life SaaS companies, or require borrowers to sign up for daily or weekly repayment schedules, which are a mismatch for the companies’ needs. We set out to provide a funding solution that would enable a wider range of businesses to access the capital they need.

Business Characteristics 

To be eligible for our revenue-based loan solution, businesses must have $1 million or more in annual revenue, a substantial portion of which is historically re-occurring. They must be based in the United States (other than in Nevada, North Dakota, South Dakota or Vermont, where we do not currently offer or make loans) and have been in business for at least two years. In addition, they should have 25%+ gross margins on average, to ensure that there is enough room to both repay the loan and fund business operations. Businesses that are not cash flow- or EBITDA-positive may qualify for financing, if they demonstrate that they’re on a rapid growth trajectory that will be accelerated with additional funding and have business owners with good credit.

We try our best to identify financing solutions in situations that present roadblocks to venture capital investors or recurring revenue lenders. We are willing to look at businesses that experience lumpy revenue over the course of the year. We look to partner with management teams and other capital providers to help fund refinancings, recapitalizations and changes in ownership.

Loan Structuring

Our revenue-based loans resemble conventional term loans in that they are fully drawn at closing and payable over time with a set maturity date. However, there are many key differences between our revenue-based loan and a conventional term loan that bear discussion.

First, compared to conventional term loans, which will have fixed monthly payments, our revenue-based loans allow for flexible, variable monthly payments based on an agreed-upon revenue share percentage. Thus, under a revenue-based loan, businesses will pay lower monthly payments in months when their revenue is down and then make up the difference during months when revenue is higher. For businesses that experience significant lumpiness or seasonality in their revenues, we work to structure our loans to smooth out the company’s cash flow when paying back the loan and avoid having too large a repayment come due at maturity.

Also, while conventional term loans have a fixed interest rate that accrues on borrowed funds, our revenue-based loan product has a set repayment amount that is fixed prior to closing. For a company looking for funding to fuel its growth, this structure enables it to bring capital onto its balance sheet without having to issue dilutive equity. As the company generates revenue, the repayment amount on the loan is reduced and the company organically de-levers. Upon repayment of the revenue-based loan, the company can raise capital, if it’s still needed, from a position of strength compared to when they were first looking for funding.

Let’s look at an example:

Rebecca owns a professional services business with a loyal customer base that has stuck with her over the years. Her company has $2.5 million in annual revenue, which primarily gets paid out by clients in quarterly installments, and $500,000 in EBITDA. One of her primary competitors has announced that it is going out of business, and Rebecca would like to hire a few of their top performers. She needs $500,000 to bring them onboard. By her conservative estimates, she projects she will be able to grow top line revenue to $4 million, and EBITDA to $1M in two years, after onboarding the new hires and their books of business.

Rebecca first thinks to turn to explore her options at the banks in town. Unfortunately, her  revenue is too lumpy for most bank underwriters to get comfortable with, and the few that are willing to consider the deal tell her that she will need to pledge her personal assets as collateral, including her home and investment portfolio.

Next, she explores outside equity investments. Rebecca’s business is not in an industry that’s considered “hot” for venture capital investors, but between friends, family and a local investment firm, she believes she can round up capital by selling equity in her business. The valuation the lead investor has placed on her company is $2 million, which is based on a 4x EBITDA multiple. Rebecca doesn’t like the idea of selling 25% of her business to raise the money she needs to bring her new hires onboard, but at least she has an option on the table. 

Finally, Rebecca receives an offer for a revenue-based loan from NepFin for $500,000 with a 1.3x repayment multiple ($650,000), payable in two years with a 9% monthly revenue share rate. She takes the revenue-based loan, confident in her ability to grow her business and excited about her ability to do so without diluting her ownership in the business. 

In the first month after closing, her business generates $75,000 in revenue; NepFin’s 9% revenue share percentage results in $6,750 being paid back on the loan. In the second month, Rebecca’s business generates $125,000 in revenue; NepFin’s 9% revenue percentage results in $11,250 being paid back against the repayment amount. The third month, when Rebecca typically collects the bulk of her quarterly fees from clients, is bolstered by the addition of her new hires; her business generates $450,000 of revenue, of which $40,500 is payable to NepFin. Thus, after three months, the outstanding repayment amount on the loan to Rebecca’s business is $591,500 ($650,000 - $6,750 - $11,250 - $40,500). 

After two years, Rebecca has repaid her loan in full. Moreover, she has been able to achieve her growth goals of $4 million in revenue and $1 million in EBITDA without selling any equity in her business. She paid off her loan in full through the steady, organic growth that it funded. Had Rebecca sold equity early on to bring her new hires on board, her equity ownership interest in her company would be worth $1 million less after achieving her goals.

Conclusion

Revenue-based loans can be a helpful tool for businesses that want to tap their future revenue as a source of funding but don’t find the solutions they’re looking for from outside equity investors or traditional bank lenders. To learn more about this financing product or discuss whether it might be a fit for your business, please click the link below

 

 

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