1. Revenue Based Financing: An Alternative to Traditional Funding
By Terrence Ammons, Partner, Porter Keadle Moore, LLP
During the course of assisting a financial technology client with raising growth capital, we were
introduced to a unique method of financing that many businesses in the technology space have
never heard of before: “Revenue Based Financing.”
In revenue based financing, the investor, or lender, provides funds to an organization and is
repaid not based on a level dollar amount or an eventual sell of the business, but based on a
small percentage of monthly revenue. Revenue based financing works well when a company
desires to continue to operate as an independent business or where a sale with a large cash
payout is not likely or desired. Naturally, the business needs to be generating some level of
revenue, but it allows for fluctuations in sales and in essence, turns loan repayment from a fixed
expense into a variable expense.
This type of financing is best considered by companies when there is a lack of hard assets that
can be used for collateral. It also works well for companies with seasonal or unpredictable
revenue streams. For entrepreneurs, revenue based loans are typically structured in a way that
eliminates dilution and control issues for the founders and there is generally not a board seat for
the lender or investor. The investment usually does not require a valuation of the business or
personal guarantees from the owners. Revenue based financing is a viable option for
organizations that have operated without outside funding and allows for companies to grow
without the need to create an exit strategy – which benefits investors as well. The typical
payback for these loans is three to five times the investment but, because a large exit is not
needed, there is less pressure on the company to hit a home run.
Revenue based financing is not a fit for all organizations; however, it is an alternative that
technology entrepreneurs should definitely consider. Please feel free to contact Arvil Stanford at
Porter Keadle Moore, LLP if you are interested in learning more about revenue based financing.
Contact Information
Arvil R. Stanford
astandford@pkm.com
404.420.5796