Revenue-Based Financing for Technology Companies Without Any Hard Assets
What’s REVENUE-BASED FINANCING?
Revenue-based financing (RBF), also referred to as royalty-based financing, is really a unique type of financing supplied by RBF investors to small- to mid-sized companies in return for an agreed-upon number of a business’ gross revenues.
The main city provider receives monthly obligations until his invested capital is paid back, plus a multiple of this invested capital.
Investment funds that offer this excellent type of financing are classified as RBF funds.
– The monthly obligations are known as royalty payments.
– The proportion of revenue compensated through the business towards the capital provider is called the royalty rate.
– The multiple of invested capital that’s compensated through the business towards the capital provider is called a cap.
Most RBF capital providers seek a 20% to 25% return of investment.
Let us use a simple example: If your business receives $1M from your RBF capital provider, the company is anticipated to pay back $200,000 to $250,000 each year towards the capital provider. That comes down to about $17,000 to $21,000 compensated monthly through the business towards the investor.
As a result, the main city provider expects to get the invested capital back within four to five years.
What’s The ROYALTY RATE?
Each capital provider determines its very own expected royalty rate. Within our simple example above, we are able to work backwards to look for the rate.
Let us think that the company produces $5M in gross revenues each year. As indicated above, they received $1M in the capital provider. They’re having to pay $200,000 to the investor every year.
The royalty rate within this example is $200,000/$5M = 4%
VARIABLE ROYALTY RATE
The royalty payments are proportional to the peak type of the company. Anything else being equal, the greater the revenues the business generates, the greater the monthly royalty payments the company makes towards the capital provider.