revenue-based financing panel discussion - for lawyers
TRANSCRIPT
Revenue-Based Financing
Presenter and Moderator: Joe Wallin, Carney Badley Spellman
Overview
About Lighter Capital
What is revenue-based financing?
How it works
How does it differ from other sources of capital?
Key terms of revenue-based financing agreements
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Speaker Introduction Renwick Congdon
CEOJay Goyal
CEOMolly Otter
CIO
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$100M Debt Facility $15M Equity Investment $40M Under Management
About Lighter Capital
Our Leadership Team & Investors
CEO: BJ LacklandCIO: Molly Otter
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Since 2010, provided 200+ financings across 150+ tech companies. Most active revenue-based finance lender in the country providing $50K to $2M in non-dilutive growth capital.
About Lighter Capital
Our Customers
Lender loans funds to a business, and receives payments based on a percentage of its ongoing gross revenue
Loan proceeds are used for long-term growth capital
Borrower’s payment amounts vary over time,
increasing or decreasing according to business revenue
What is Revenue-Based Financing?
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How it WorksRepayment terms are different from typical bank
loans.• Monthly payment amounts are a percentage of
the prior month’s “Net Revenue” until a “Return Cap” is reached.
• The “Return Cap” is usually a multiple of the amount loaned (e.g., 1.35-2x)
• Thus, the definition of “Net Revenue” is important in a revenue loan.
Because monthly payments vary, interest is also calculated differently.
No equity required
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How it Works
Repayment Cap = Total payback amountRoyalty Rate = Monthly payment amount
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(determined by term)
(determined by loan amount)
Repayment Cap 1.35X-2.2x
Royalty Rate 1-10%
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Monthly repayment amount is determined by reference to the borrower’s revenues (net cash receipts in the month immediately preceding the month in which payment is due).
Similar to “royalty based financing” because the repayment schedule is similar to how a royalty payment would be calculated.
For example, the term sheet might describe loan repayment terms as:
• “___ % of the borrower’s preceding month’s net cash receipts, due and payable on the 5th day of each month.”
In some cases, there may be tier structures that will change payments throughout the year. For example, initially at 8% until the lender has received a certain amount of repayment that year, then decline to a lower percentage for the remainder of the year.
Monthly Payments
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Example: ABC Co. $100K Growth Funding
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3 Month Avg. Revenue $60,000
Annualized Run Rate $720,000
Loan Requested $100,000
Maximum Loan Size $240,000
Repayment Cap 2
Total Obligation $200,000
Royalty Rate 4%
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Interests of borrower and lender are aligned Monthly payments adjust to revenue cycles Typically secured only against company assets
No personal guarantees Borrower does not need to have hard assets
or physical inventory (a benefit for tech companies)
Does not dilute Founder ownership Lender does not take board seat or control
business decisions Quicker source of funding Can repay loan early as revenue growth allows:
if borrower grows fast, the loan will be paid back more quickly
No pressure to sell the company; lender doesn’t depend on sale or IPO to receive return
Advantages of Revenue-Based Financing
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How Do We Compare?
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Credit: Banks require borrowers to have good credit ratings
Assets: Banks typically require hard assets as
collateral
Guarantees: Banks may require personal guarantees, so the Founder’s own assets are on the line
Interest: Banks use fixed interest rate and may impose prepayment penalty
Repayment: Bank loans typically require fixed monthly payments that don’t adjust for the borrower’s ability to pay
Revenue-Based Financing vs. Bank Loan
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Angel investment or venture capital investors buy equity in the companyDilutes Founder ownershipCost of capital may be high
Investors may require a seat on the board of directors Investors control some business decisions
Equity financing requires a valuation of the company
May require substantial legal fees, and take time and attention away from running the business
Revenue-Based Financing vs. Equity Financing
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Key Term 1: Net Cash Receipts Typically akin to cash revenue (again think about
how a royalty would be calculated).
When you move from “gross” to “net,” you are not typically netting a lot of items.
For example, you might net out the following items: customer returns and shipping charges.
This can vary based on the deal.
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Revenue loans have a “return cap” or a “repayment amount.”
For example, the loan amount might be $200,000, but the loan won’t be paid in full until the borrower has paid the lender 2x the loan amount. (e.g. $400,000)
Key Term 2: Return Cap
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A revenue loan will have a maturity date.
It might be 3, 4 or 5 years or more; or earlier if the lender has received the Return Cap.
If the company has not paid back all amounts borrowed before the maturity date, the remaining amounts will become due and owing on that date.
Key Term 3: Maturity Date
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No predetermined interest rate or payment.
Each payment represents both interest and principal.
Determining the percentage of interest requires more complex calculations than a normal loan.
Interest rates are variable monthly
Key Term 4: Interest
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Revenue loan lender will take security interest in all of the company’s assets
But, lender may subordinate to bank loans, and security interests relating to equipment and other hard assets
Revenue loan agreement may only allow certain “permitted liens” on the company or its assets
Key Term 5: Security & Subordination
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Lenders will want the right to check on a borrower’s level of revenues
Review financial statements
Lender may obtain the right to view borrower’s bank accounts in real time
Key Term 6: Access and audit rights
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Lender may impose some restrictions intended to protect revenue stream
For example, borrower may not take on additional debt or liens, loan its own capital, or dispose of material assets without lender’s consent
Key Term 7: Restrictive Covenants
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Some states have usury limitations.
Default interest rate can’t exceed maximum rate allowed under state law.
Some states exclude a “profit share” from the definition of interest (see, e.g., Texas).
Choice of law and the physical location of the lender and borrower also impact whether usury restrictions apply.
Key Term 8: Usury Limitations
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APPENDIX
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Licensing Information › Lighter Capital is a direct originator of commercial loans in the United States. Lighter Capital may not be all to provide loans in all states. We have funded companies in over 26 states and have licenses in the following states:
› California› North Carolina› Tennessee
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Standard Fees, Disclosure, and Terms
Legal Fees $3,500
Cost of Capital 15-30% APR
Financial Covenants None, no personal guarantees
Negative Covenants - Additional debt- Divesting major assets in which the
loan isn’t being repaid- Making certain payments, loans
and advances outside of the ordinary course of business
- Bonuses and distribution
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Standard Fees, Disclosure, and Terms
Standard Default Terms - Failure to make payments- Another person/entity becomes party to the
collateral without prior consent- An event that materially changes the business- A key employee violates non-compete clause or
leaves the company- Any event that causes the company to become
insecure or insolventKey Employee Insurance & Non- Compete
- All key employees are required to sign a non-compete document for the life of the loan.
- If the loan is $250K or higher, borrower is required to have key person life insurance for all key employees in the amount of the loan
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Standard Fees, Disclosure, and Terms
Affirmative Covenants - Monthly reconciliation of Net Cash Receipts (completed within our secure portal)
- Monthly P&L and Balance Sheet- Annual Tax Returns- Other standard business operating covenants