SpotOn Financial

Revenue Based Funding

Intro To REveNue Based Business Funding

We have identified eighteen other names. The most commonly used alternatives are revenue loan, revenue-based funding, royalty financing, and royalty-based financing. Many names but all a form of alternative financing.

What is revenue-based financing?

Revenue-based financing ("RBF") is a loan in which repayments are based on a percentage of the borrower's monthly revenue rather than a fixed amount. The payments fluctuate with the borrower's financial performance, going up when revenue is strong and down when it is lower.

How does revenue-based financing work?

RBF can be structured in many different ways. The most common structure is a term loan. Typically, the full amount is not advanced up front. The drawdown can occur over multiple years so that interest expense is not incurred until the funds are needed. Payments (which include principal and interest) are based on a fixed percentage of revenue or cash receipts from the prior month or quarter.

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The structure is flexible; generally, payments are made until one of the following milestones occurs:

The lender receives a pre-determined multiple of the original loan;
The lender achieves a pre-determined internal rate of return (IRR); or
A terminal date is reached.

After the milestone is reached, the loan obligation is retired and no further payments are due.

What are the benefits?

RBF is non-dilutive (i.e. the lender does not require warrants or other equity that results in stock dilution or share dilution).
Lenders do not require board seats or other direct involvement in the governance or operations of the company.
Personal guarantee is generally not required.
Collateral is generally not required.
Minimal restrictive covenants.
No minimum monthly principal payments.
Borrower does not have to be VC-backed.
No valuation is required,
Due diligence process is simpler and faster than an equity fundraising.

What are the drawbacks?

By definition, the borrower must be generating revenue.
The business should have strong gross margins since a significant percentage will be used for loan repayments.
There is no stated interest rate so the borrower must estimate the cost using an Excel model.
If company is required to borrow the entire loan amount up front, the cost may be higher than an MRR line of credit which is borrowed as needed. Some RBF lenders have addressed this issue by allowing borrowers to draw the loan as needed.
Companies with strong cash flow or substantial "hard assets" (e.g inventory, real estate, equipment) may have access to less expensive sources of capital. However, RBF may be a good complement if additional capital is required.
Depending on the structure, pre-paying or refinancing an RBF can be expensive.
Last but not least, it must be repaid! A company should not utilize debt financing if management or the board does not believe

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What companies provide RBF?

Non-bank lenders and investment funds.

What Is The Time frame for Funding?

Typically less than 45 days.

What Industries Qualify For RBF?

Technology

E-Commerce

Oil and Gas

Food and Beverage

Truckstop or Gas Station

Fuel or Food Distribution

Are there Upfront Fees?

Yes, there are typically upfront fees specifically being legal fees, accounting fees, origination, and broker fees.

How Do I Know I Qualify?

To qualify for (RBF) a business should be generating a minimum of $250,000 a month. The model should be a subscription based or similar recurring revenue model.

What Does SpotOn Financial Do?

SpotOn Financial has direct relationships with Venture Capital and Alternative Finance companies. These companies do not pay SpotOn Financial a fee. This model allows SpotOn Financial to be completely independent and only recommend or select the lender if the lender is the right fit for our client.

Are my fees to SpotOn Financial Refundable?

Yes, select fees paid to SpotOn Financial are refundable but are specific to the engagement agreement you sign.

Find out more

How Do You Qualify

What do lenders look for in potential borrowers?

Size: Minimum size varies widely by lender. One well-known lender requires annual revenue of at least $200,000; another requires $2 million. Lenders do not usually specify a maximum size but $50 million is a practical limit.
Recurring revenue: Lenders prefer subscription-based companies such as SaaS, but any company with reasonably predictable topline performance is a candidate for RBF.
Positive historical and projected growth
High gross margins: Since loan payments can be a significant percentage, the lender does not want the payments to put the company in a loss position.
EBITDA: Company should be cash flow positive or close to it.
Modest current debt obligations
Industry: Can be technology or non-technology sector.
Ownership: Borrowers are usually closely-held private companies that are not sponsored by a venture capital or private equity firm.

What are the key provisions of a revenue-based financing term sheet?

Structure: Varies, but a common structure is a secured term loan, often subordinated to the rights of a senior creditor (e.g. bank, asset-based lender, or lessor). Also see answer above to "How does it work?"
Amount of loan: The maximum loan size depends on the borrower's size, profit margins, and other factors. A rule of thumb from one lender is that the loan cannot exceed one-third of your annualized revenue run-rate. Typical loan size ranges from $50,000 to $5,000,000, although some lenders can provide larger amounts.
Drawdown period: Varies.
Term: Usually 3 to 5 years.
Interest rate: There is no predetermined interest rate. Each payment includes both interest and principal.
Monthly payment: Payments depend on the loan term and other factors. The longer the term, the lower the payment as a percentage of monthly revenue. It is typically 1.0% to 3.0%, but can be up to 8.0%.
Payment cap: The cap varies widely depending on the term of the loan (longer period requires larger cap) and other factors. Typical cap is 1.5x to 2.5x of the original loan amount, which implies an interest component of 0.5x to 1.5x of the original loan amount.
Equity participation: Normally, the lender does not require warrants or kickers that result in equity dilution.
Collateral requirements: Varies. Hard assets are generally not required, but lender may require a security interest in all the company's assets.
Restrictive covenants: Generally, loans do not include financial covenants such as coverage ratios. However, lender may place restrictions on additional borrowings, disposition of assets, and other actions that may affect the company's ability to repay the loan.
Governance: Generally, the lender does not require a board seat.
Personal guarantee: Usually not required.
Access and audit rights: Lenders require access to financial statements and bank account data to monitor company's financial performance and verify compliance with loan agreement.

Revenue based funding is merely one example of sources of funding for businesses SpotOn Financial can provide as a form of alternative financing for any business.

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To determine if your business will qualify for revenue based funding. We think you should consider the following before you apply for funding.

1. Audited Financials- If your business cannot provide audited financials to show your revenue stream. We strongly suggest before you seek investors or lenders. Spend the time and hire a CPA or Firm that can prepare fully audited financials.

2. Pre-Revenue- If you are pre-revenue company. Then we suggest you have a strong business plan and a clear revenue strategy. Afterall, you are asking for revenue based funding. Show the lender and your investors the money.

3. Existing Business- To bring a revenue based lender onboard you need to have a clear stream of revenue. Most lenders prefer a subscription based model or a strong recurring revenue model.

4. Revenue-Sales Forecast- More revenue based funding deals "blow up" because the company or revenue simply cannot show a way to either consistently maintain revenue or with funding increase sales. Make sure the sales and marketing strategy can support growth.

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What Is Revenue Based Funding?

Revenue Based Funding

Intro To REveNue Based Business Funding

What is revenue-based financing?

What are the benefits?

What are the drawbacks?

Broker Pro-TIP

What companies provide RBF?

How Do You Qualify

What do lenders look for in potential borrowers?

What are the key provisions of a revenue-based financing term sheet?

BRoker-PRO TIP

REVENUE BASED FUNDING- ALTERNATIVE FINANCING

What Is Revenue Based Funding?

Revenue Based Funding

Intro To REveNue Based Business Funding

What is revenue-based financing?

What are the benefits?

What are the drawbacks?

Broker Pro-TIP

What companies provide RBF?

How Do You Qualify

What do lenders look for in potential borrowers?

What are the key provisions of a revenue-based financing term sheet?

BRoker-PRO TIP

REVENUE BASED FUNDING- ALTERNATIVE FINANCING

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