REVENUE-BASED FINANCING
Revenue-based financing is not a standalone instrument, but rather a specific form of mezzanine debt in which repayments are linked to the company’s revenue or earnings. Instead of fixed payments, investors receive a share of operating revenue until a predefined multiple is reached. Investors and entrepreneurs are both interested in the company’s ability to create sustainable revenue. Investors are repaid incrementally as the company generates more sales, typically receiving a predetermined return on their investments. Revenue-based debt agreements are usually structured as subordinated loans or closely resemble profit-participating loans. They often also include an option to convert into equity (typically non-voting) or similar instruments. Revenue-based financing is a well-known structure in the investment world, making it familiar to a broad range of investors.
- Revenue shares are easy to implement and monitor because revenue is an easily measured, uncontroversial metric of performance.
- Entrepreneurs benefit from a flexible payment structure, as payments to investors are directly proportional to company performance. If the company’s revenue grows quickly, investors are repaid over a shorter period; if growth is slow, investors achieve their returns over a longer timeframe.
- Investors also benefit from the security of having direct access to revenue, independent of the company's other financial metrics or overall profitability.
- This, however, can be seen as an additional risk for follow-on investors and debt providers and it can put a company in a difficult position if costs remain high when royalty payments activate.
- The repayment calculation isn’t necessarily limited to revenue – it can also be based on EBITDA or gross margin. This brings revenue-based financing sometimes also close to other participatory instruments such as profit participation loans.
Revenue sharing is most suitable for companies that know their revenue and cost structure well and do not foresee any significant changes to it. For companies that are still changing and adjusting their business model, margins, etc., setting a revenue share can become a major risk. The model is less well suited for companies in sectors with high scaling costs, as they may end up having to repay investors even as they are still making significant losses.
- Revenue Share Percentage
- Total Repayment Cap (Multiplier)
- Payment Frequency
- Term Length (no fixed maturity date, but the loan is repaid over time until the agreed-upon repayment cap is reached).
- Minimum or Maximum Payment Limits (some agreements set floors or ceilings on payments to balance cash flow stability for the business)
- Security & Seniority (generally unsecured but may include covenants)
