Revenue-Based Financing for Technology Companies With No Hard Assets
What’s REVENUE-BASED FINANCING?
Revenue-based financing (RBF), also referred to as royalty-based financing, is a distinctive type of financing supplied by RBF investors to small- to mid-sized companies in exchange for an agreed-upon percentage of a business’ gross revenues.
The capital provider receives monthly payments until his invested capital is repaid, along with numerous of that invested capital.
Investment funds that offer this distinctive form of financing are known as RBF funds.
TERMINOLOGY
- The monthly payments are known as royalty payments.
- The percentage of revenue paid by the business for the capital provider is known as the royalty price.
- The several of invested capital that’s paid by the business to the capital provider is known as a cap.
CASE STUDY
Most RBF capital providers seek a 20% to 25% return on their investment.
Let’s use a very easy instance: If a business receives $1M from an RBF capital provider, the business is anticipated to repay $200,000 to $250,000 per year towards the capital provider. That amounts to about $17,000 to $21,000 paid per month by the business for the investor.
As such, the capital provider expects to acquire the invested capital back within 4 to 5 years.
What is THE ROYALTY Price?
Every single capital provider determines its expected royalty price. In our basic example above, we can perform backward to identify the rate.
Let’s assume that the business produces $5M in gross revenues per year. As indicated above, they received $1M from the capital provider. They may be paying $200,000 back towards the investor every single year.
The royalty rate in this example is $200,000/$5M = 4%
VARIABLE ROYALTY Price
The royalty payments are proportional to the top line of the business. All the things else becoming equal, the greater the revenues that the business generates, the greater the monthly …
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