By guest authors Irina Patterson and Candice Arnold
Andy: What we look for are companies that have figured out – no matter what their size is – how to make money in one way or another. They basically have what we call a revenue engine, and what’s lacking is they need capital to rev that engine. We look for those opportunities.
When we find them, we make a determination about the amount we would like to invest. Our investment amount is generally $100,000 to $500,000.
We are in the process of looking at a deal larger than that as well. We’re considering doing up to $1 million. But right now, our stated focus is $100,000 to $500,000. So, we filter through the leads that come in.
We decide on a company that we want to invest in, and then we issue them a term sheet, which articulates the amount that we would invest as well as the target RevenueLoan term and the target RevenueLoan cap.
The best way to explain our process is with an example.
Let’s assume for a moment that you have a software company that’s doing $1.2 million in trailing 12-month. For simplicity’s sake, let’s just assume it’s $100,000 per month. We’ll invest up to 20% of that trailing 12-month.
So, in that case, the most that we would want to invest is $240,000. Our target is probably closer to $200,000 on a company of that size. Let’s assume, in this example that I’m giving you, that we proposed investing $200,000. We would issue a term sheet, and the term sheet would say, “We’re going to invest $200,000, and we would like a 4% RevenueLoan rate up to a target cap of two times our money.”
What that means is starting after they close the deal, the company is agreeing to pay us 4% of their top-line revenues, basically net cash. In this case, we would get $4,000, 4% of $100,000. Let’s assume their revenues stay flat. We would get $4,000 per month.
And let’s assume that their revenues stayed flat for the duration of the investment. In the first year of the investment, we would collect $48,000 from that company. We would continue to collect that 4% of revenues until they had paid us two times our investment, so a total of $400,000. That’s how it works.
There’s no term that’s agreed to. There’s no duration of the bad credit payday loan. Basically, it’s totally tied to revenue. When we do the investment, we agree on the rate. That’s the 4%. And we agree on a cap. In the example I gave you, I used the simple cap of 2x. The cap can be as low as 1.3x and as high as 3x.
It totally depends on the risk of the company, the perceived risk in the revenues of the company as well as the stated duration by the entrepreneur. In the example I gave you, it was 4% and 2x.
I could have modified the example and said it’d be 4% and 1.5x. What that means is they’re paying us 4% of revenues, which, in this instance, translates into $4,000 per month because I said we’re going to assume that they make $100,000 every month. And they pay that until they reach the cap. So, if the cap is 1.5x, they pay that until they’ve paid us $300,000. If the cap is 2x, they pay that until we get to $400,000.
Irina: Once they’ve reached the cap, they’ve paid off the loan?
Andy: Yes, that’s it. They don’t owe us anymore.
Irina: So, you don’t deal with the valuation of a company?
Andy: No. You’re getting at the benefits of a revenue loan. We never have a conversation about valuation. The benefits to the company are that they’re not diluted, nor do they sign a personal guarantee.
In many instances, often more important, their payments toward that revenue loan are totally tied to the performance of the company.
So, if the company, in the example that I gave you, suddenly just took off. Then, they would pay us back more quickly.
If, on the other hand, revenue stalled for one reason or another, then payments would also get slowed down. That’s just the natural flow to it. The value of a revenue loan is that it aligns the entrepreneur’s incentive to grow the business and grow revenues with the investors’ incentive. That’s one of the unique characteristics of revenue-based finance.