Revenue Based Financing Case Study

Revenue based financing is a debt product that is essentially a 4-5 year term loan with a 2X payback to the investors. The product payment terms for revenue based financing are not fixed. The payment terms are based on the monthly revenues of the borrower and are variable according to the monthly revenue of the business. The borrower is committing to pay a small percentage of their monthly revenue towards the value of the loan.

The following is a story about a client of mine and their capital journey using revenue based financing.  This company is about 7.5 million of revenue. This is an accounting software company. They needed an extra million dollars to accelerate some product development for new products they’re really happy about. This business was basically break even.

Revenue Based Financing Case Study

The company had products they were selling and were profitable. They were already working on a lot of other products that were basically taking their free cash flow. This one product sort of emerged as one that could really be a game changer. They had the choice: either stop developing other products, or they needed to raise some additional capital to keep everything moving because they had a lot of inbound customer interest.

Lantern Capital Advisors got hired and quite candidly, I thought this was going to be a pretty easy project. They just needed $1 to $2 million. But the balance sheet was kind of tricky. There was some other debt from local investors on their balance sheet. The management team wasn’t young. They had been in business for over 15 years. When I went out to the capital markets, I kind of looked at some venture debt type groups like Silicon Valley Bank, RBC, and other groups like that.

For foreshadowing, but RBC passed on it or actually they said, “Hey, we’d be really interested if you get a venture capital fund involved.” So I went to the venture capital people and they just sort of felt like, well, this wasn’t like your young startup with young cool people wearing tennis shoes. These guys were older. We’re not really sure if it’s really going to grow the way they think.

So to make a long story short, the banks just really weren’t that interested. So I ended up finding a group that was providing a new type of financing at the time called Revenue Based Financing. Revenue Based Financing is a debt product, and it’s a term loan that is a 4 to 5 year relationship. 

Revenue Based Financing Payment Schedule

When you think of a term loan, a typical term loan is like a car payment or a mortgage. You borrow money, and you have the same payment every month. Well, with Revenue Based Financing, instead of having it be the same payment every month, instead of committing to a fixed monthly payment, what businesses are committing to is paying a small percentage of their monthly revenue towards the loan. So the idea is, is that in the early years the payments are less because cash flow is tight.

But as the revenues grow, the payments increase later in the term to where the cash flows technically should be better. The concept is the payments are variable based on you. Basically on the 15th of the month, companies just take the prior month’s revenue, multiply it by in this case 2%. That’s their revenue based financing payment for that month.

While the payments are variable, the total payback is fixed and it’s at two multiple. So if the company borrows $1,000,000, the investor is getting back 2 million over five years. From a cost of capital perspective, this is north of 20%. So it is not inexpensive capital, especially relative to bank financing and other loan instruments. 

Revenue Based Financing Payment Schedule

Interestingly, they just took an initial draw of $500,000, and they had an option to take another $500,000 when they chose to later on. They’re making a payment of 2% to the prior month revenue. And based on the prior months revenue, actual revenue, that’s what their payment is. So it fluctuates with their revenue.

As revenues increase, payments increase, which should work with their cash flows. So they know what their payback obligation is, why they just reach $2 million in two and a half years. That’s the end. Correct. You could pay it off earlier at slightly lower multiple. So for instance let’s say in the first year you could refinance it or somebody is going to provide you equity, you could buy it out at less than the two multiple, but once you get past two years you’re pretty much locked in.

So if you pay it off earlier, you pay it off earlier. Why did it change from 2% to two and a half percent? To make the math work, to get back to the two multiple, sometimes there’s a slight variation in that number as well. So it’s about two years and they’re hoping you’re making progress at that point.

There’s a discount in the first two years, but you’re underwriting for the long term anyway, so they have risk. So you have a window to do that. Some other key terms with revenue based financing: There’s no personal guarantees, there’s no warrants. So the discussion about warrants is not there. There’s no board seats, and then there’s no financial covenants.

So you basically have to make the payments. That’s what they say is your obligation. 

Revenue Based Financing Growth Valuation Schedule

The company ended up taking that capital. They actually increased it to $1.5 million from $1 million. They were doing $7.5 million of revenue three years later. I told you earlier no one had wanted to provide them capital earlier. With the revenue based financing product, they grew their business, and went back out to the capital markets a three years later.

Revenue Based Financing Growth Valuation Schedule

This time they raised $12.5 million with a $36 million valuation. They paid off all their other debt. They still kept two thirds of the company. Today, the business is private equity owned, and it’s well over $20 million of revenue. Most of it’s recurring revenue. So it now has a valuation that’s probably $65 million or greater.

When they wake up with $12.5, they still retain ownership and control. So fast forward a few more years. They then turned to venture capital where they gave up some piece of the company at that point and put some real money into their pockets that was actually a mix of debt and equity. 


There’s a couple key points with Revenue Based Financing. 

Finance is changing all the time. 

Revenue based financing is a product that didn’t exist a decade ago.

Revenue based financing is an expensive product. However, you can see where it can create a lot of value quickly if you’re able to execute with it and preserve ownership and control in the business. 

What is important for any business when looking for capital to grow is to understand all of the products available and secure the best one that works for your business in the next 3-5 years to help you achieve your business objectives. If revenue based financing is something you may be interested in using for your business, feel free to reach out to me at Lantern Capital Advisors and we can get started.

Read More Blog Posts About Revenue Based Financing:

Case Study In Growth: Using Revenue Based Financing (RBF) to drive greater growth and enterprise value

Revenue Based Financing: Refinance Your Merchant Cash Advance Loans