Revenue Based Loan or Revenue Based Financing

Debt Term

Revenue based loans, sometimes called revenue based financing or revenue sharing loans, are an alternative to equity financing for certain types of high growth companies. The basic idea is that repayment is set as a fixed percentage of revenue, rather than fixed (as with many term loans) or declining (as with some lines of credit). In return for this special repayment, providers of revenue based loans receive a relatively high interest rate.

Revenue based loans make sense for companies with a high gross margin. Software as a Service is one industry targeted by certain providers of this specialized financing. The origin of this financing product goes back to mining and oil and gas companies, who sometimes used specialized revenue sharing financings to fund big projects. A version of revenue sharing has also been used in intellectual property licensing.

In some cases, the revenue sharing or royalty goes on for long periods of time, so it more resembles equity financing. However, a revenue-based loan has a pre-defined cap on the maximum repayment.

Revenue Based Loan Terms

As an example, here are the terms from the web site of Lighter Capital, which says it has funded more than 180 technology companies with revenue loans:

  • Up to 1/3 of your annualized revenue run rate [available total funding]
  • Up to $2M in growth capital for your tech startup
  • Repaid over 3–5 years
  • You pay between 2–8% of monthly revenue
  • Repayment caps usually range from 1.35x to 2.0x

Other funders using similar models include Cypress Growth Capital and Next Step Capital Partners.

Don Gooding

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