Income-based financing for non-hard-asset technology companies

What is revenue-based financing?

Income-based financing (RBF), also known as royalty-based financing, is a unique form of financing provided to small and medium-sized enterprises by RBF investors in exchange for an agreed percentage of total business revenue [19459003

– An investment fund offering this unique form of financing is known as the RBF Fund

– Monthly payments are called royalties

– Percentage of income paid by an enterprise to a capital supplier is called the usage rate

– the amount paid by the enterprise to the capital


Most RBF capital providers seek 20 to 25 percent return on investment

Let us use a very large number of investors who have a very high investment capital

A simple example: If a firm earns $ 1 million from an RBF capital provider, the company expects to pay $ 200,000 to $ 250,000 annually to the capital provider.

What is

Each capital provider determines its own expected royalty rate.

Capital Contributors are expected to recover their investment capital in four to five years. In the simple example above, we can work backward to determine interest rates

Let us assume that the firm's total annual revenue is $ 5 million. As mentioned above, they received $ 1 million from the capital providers.

In this example, the fee for use is $ 200,000 / $ 5M = 4%

Variable Profitability

Proportional to. Everything else is equal, the higher the income generated by the business, the higher the monthly royalties the firm pays to the capital providers.

Traditional debt consists of fixed payments. Therefore, the RBF scenario seems unfair. To some extent, business owners are punished for their hard work and successful business.

In order to remedy this problem, most royalty financing agreements contain variable use rate schedules.

Accurate scale sheets are negotiated between the parties and are clearly outlined in the glossary and contract

How to

Every rapidly growing enterprise, Is a technology company that will eventually outgrow their demand for this type of financing

As corporate balance sheets and income statements become stronger, companies will embark on a financing ladder to attract more traditional financing solutions providers s concern.

Purchase Option:

Business Owners Always There is an option to purchase a part of the toll agreement.

In general, a capital supplier may expect to receive a certain percentage (or multiple) of its investment capital prior to the acquisition of the option. The provider exercises the option by making a single payment or multiple lump-sum payments. Payments purchased a percentage of the royalty agreement.

In some cases, the firm may decide to buy and put out the entire investment project

This often happens The enterprise is sold and the acquirer chooses not to continue the financing arrangement. Or when the business has become sufficiently strong to obtain a cheaper source of financing and want to be financially restructured

In this case, the firm can choose to purchase the entire concession Fee agreement, investment capital. This multiple is often called a cap.

Use of Funds

There are usually no restrictions on how RBF capital is used. Unlike conventional debt arrangements, there are few restrictive debt covenants on how firms spend their money.

Capital providers allow business managers to develop their business using funds they deem appropriate.

Acquisition financing:

Many technology companies use RBF funds to acquire other businesses to increase their growth. RBF capital providers encourage this form of growth because it increases the income that can be applied to its patent rate.

As the business grows through acquisitions, RBF funds are paying higher royalties, thus benefiting from growth.

Technology companies are unique because they rarely have the backing of the technology companies

No assets, no personal guarantees, no traditional debt: Traditional hard power assets, such as real estate, machinery or equipment. Technology companies are driven by intellectual capital and intellectual property.

These intangible intellectual property assets are difficult to value. As a result, traditional lenders give them little or no value. This makes it difficult for small and medium-sized technology companies to obtain traditional financing

Income-based financing does not require an enterprise to provide financing collateral for any asset. Business owners do not need personal guarantees. In traditional bank loans, the bank usually requires the owner's personal guarantee, and in the event of breach of contract to pursue the owner's personal assets.

The interests of RBF capital providers are consistent with the business owners:

Technology firms can scale more quickly than traditional firms. As a result, revenues can grow at a rapid rate, allowing companies to pay patent rights quickly. On the other hand, bad products appearing on the market can quickly disrupt business income.

During the lean period, the enterprise to the bank to provide exactly the same debt payments

The interests of RBF capital providers are consistent with those of business owners. If business income is reduced, RBF capital providers receive less money. If the business income increases, the capital providers receive more money

Therefore, RBF providers hope that business income will grow rapidly, so it can rise.

Gross margin:

Most technology companies have higher gross margins than traditional companies.


RBF fund We look for high-profit business and can pay monthly fee for use comfortably.

No capital stock, no board seats, no loss of control:

Capital providers share the success of the business but have not received any equity. Therefore, the cost of capital in the RBF arrangement is cheaper in financial and operational terms than comparable equity investments.

RBF capital providers are not interested in participating in business management. The extent of their active involvement is to review the monthly revenue reports received from the business management team to apply the appropriate RBF royalty rates

Traditional stock investors want a strong voice in business management. He expects to have a board seat and a degree of control

Traditional stock investors expect a significantly higher investment capital multiplier when the business is sold.

Capital Costs:

RBF Capital Providers receive monthly payments. It does not need to sell the business to earn a return. This means that RBF capital providers can afford a lower return. That's why it's cheaper than traditional stocks

On the other hand, RBF is more risky than traditional debt. Banks receive a fixed monthly payment, regardless of their financial position.

In the balance sheet, the RBF is between the bank loan and the share capital.

Funds may be received within 30 to 60 days:

Unlike traditional debt or equity investments, RBF is a much cheaper company than traditional debt financing, and does not take months Due diligence or complex assessment

As a result, the turnaround time between delivering the terms of the financing terms to the financial controller and the funds paid to the business can be as little as 30 to 60 days.

Enterprises that immediately need money can benefit from this fast turnaround time