Revenue-Based Financing for Startups
After last week’s post on Early SaaS Loans Before Bank Credit Lines, a couple people mentioned Lighter Capital as an alternative lender that does revenue-based financing. The idea is that instead of the normal venture debt model, which is interest plus warrants in the business, revenue-based financing takes a percentage of revenue over a certain period of time, typically five years.
With a starting point of $1 million in revenue, an annual growth rate of 30% per year, and a fee of 10% of revenue for a $500,000 loan, here’s how it might look:
· Year 1 – $1,300,000 in revenue, fee of $150,000
· Year 2 – $1,690,000 in revenue, fee of $169,000
· Year 3 – $2,197,000 in revenue, fee of $219,700
· Year 4 – $2,856,000 in revenue, fee of $285,600
· Year 5 – $3,713,000 in revenue, fee of $371,300
· Total fees (which includes repayment): $1,195,600
Simply doubling the initial money over five years results in a 15% internal rate of return, so borrowing $500k and repaying $1.2 million is just a bit higher when thinking of interest rates for a normal loan. I don’t know if this is exactly how Lighter Capital works, but I believe it’s directionally correct.
The next time an entrepreneur asks about alternative lending options, mention revenue-based financing as an option.
Posted by David Cummings on David Cummings on Startupson under: