Some companies are growing so quickly that selling equity today makes little sense, even if the proceeds of sale would further accelerate growth. In such case, the valuation of the equity of the Company today is a relatively small portion of the value expected to be realized by the company principals over the next two to three years. In other cases, existing owners may be reluctant to sell or restricted from selling equity.

Some companies can accelerate growth with additional capital, but are either debt averse or have restrictions in place that limit the availability of additional debt financing.

For all of these companies, there is an alternative: Revenue-Based Financing.

How It Works

Revenue-Based Financing is in essence the purchase by an investor of a portion of the revenue stream of an existing revenue-generating company. The financing, often referred to as a “purchase” or “advance”, results in a portion of the gross revenue of the company being delivered to an investor monthly over a period defined in the investment.

The payment delivered is designed to be a small percentage of the monthly revenue of the company and is designed not to be sufficiently large as to interfere with the continued growth of the company.

The purchase price for such revenue stream, e.g., the payment delivered by the investor to the company, is a function of historical revenues of, and the projections provided by, the company. Some revenue-based investors focus on the projections, which serve as a minimum indicator of expected company performance, which will be guaranteed by one or more affiliates of the company. Affiliates often provide a guarantee or “make-whole” for the investor which provides that if the company in question does not meet or exceed the projections for a given period, any shortfall will be provided by the company or such guarantor.

For example, we have seen transactions with monthly and quarterly “make whole” provisions which require the company or the affiliate to pay to the investor any shortfall between the portion of revenue delivered by the company to the investor and the projection provided by the company.

Courtesy Clear Think Capital