Blog Post Backgroun-01

There Is No Golden Rule

First off, there are no golden rules that come to the world of financing. As any mortgage lender would say, they “take into account numerous factors.”
But that’s not very helpful, is it?

What is helpful, is knowing precisely what works. And from the numerous conversations I’ve had with lenders, investors and financiers overall, the ideal business to lend to is this:

A B2B SaaS company, generating $100k in monthly gross revenue with 80 – 90% profit margins.

Easy right? You just have to go build the perfect business and then someone will finally lend you some cash. But that doesn’t mean you must meet all those criteria for funding. Far from it actually.

In fact, we have an investor in our database who funds a revolving line of credit for as little as $1,000. Now THAT seems reasonable. You don’t need a 90% margin, million-dollar run rate business to justify $1,000 in credit. What do you need? Use our web app to find out.

See you there,
Thomas

People Working, Illustrartion

Is Revenue-based Financing Right for You?

If you want to learn about revenue-based financing (RBF), you typically end up at a site where they are also trying to sell it to you. And as a result, the message gets muddled. All of the benefits of RBF are raining down on you from on-high, and along with them, the trade-offs have been stripped out.

If you’re thinking of RBF, you’re going to be making trade-offs, so let’s display them loudly here:

You’ll pay more cash long-term, in order to pay less during your months with lower-revenue.

That’s the primary value prop of RBF. Your repayment of the loan goes up and down with your revenue, which is great, because as a startup you’re no longer stuck servicing a debt that you may not have the revenue to properly cover if you’re going through a slow month or two. The repayment adjusts to the performance of your business. However, as a result, the lender is taking a bit more risk on you. i.e. What if every month for your startup ends up being a “down-month”? Well, to make up for that risk, they charge higher interest. 

Lighter Capital for example, explains that “repayment caps usually range from 1.35x to 2.0x”. This means that the greatest amount you’ll pay back, regardless of what happens with your revenue, is 1.35 to 2 times the amount you borrowed. Seems simple enough.

That is the “cap”, which feels good to have a limit on how much you’ll be forced to repay. On the other hand though, if you went into a bank and they informed you that you’d be paying 100% APR on a loan, it may sound somewhat ludicrous. Essentially, you’ll likely be paying a high interest rate, but you’re getting lots of flexibility in return.

You’ll also give up far less long-term, than you would otherwise with equity-based investments from an angel of VC (that is, if  your startup does well).

Paying 2x the amount of the loan seems outlandish, that is, until your startup succeeds and you compare it to equity. 2x on a $500,000 RBF loan that helps you scale is certainly hefty, but it’s nothing compared to 20% of equity in a company that ends up being worth $10M. Instead of paying $500,000 of effective interest, you’re giving up $2M in equity at the exit (in this scenario at least). Those numbers obviously get even more dramatic if your company grows beyond that and becomes worth more. Imagine having a $50M startup, giving up $10M in equity – all when you could have taken out a $500k loan and paid a “measly” $500k in interest back on that over time. It kind of hurts to consider.

Revenue-based Financing is non-dilutive.

Simple. You’re trying to attract the best talent. If you have more equity on your cap table, you have more flexibility when creating compensation plans for potential co-founders or employees.

Save yourself time.

If RBF is a good fit for your company, you won’t have to spend 4-6 months doing the VC roadshow. Assuming you qualify, there are typically a few meetings, a few emails, and some paperwork and then you’re off to the races. Much better than pitch after pitch, and then driving the VCs to a close.

The obvious caveat: All of this only works if you are generating revenue.
It may be obvious, but let’s be explicit. If you’re super early-stage and don’t have revenue, RBF will clearly not be a fit. You then may have to go the angel / pre-seed route.

See what we’re working on as it relates to revenue-based financing over at Bootstrapp. I also plan to keep digging deeper into this subject moving forward so stay tuned and let me know if you’d like to see anything else in particular.