2011 Revenue Based Financing

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2011 Revenue Based Financing

  1. 1. Revenue Based Financing: An Alternative to Traditional FundingBy Terrence Ammons, Partner, Porter Keadle Moore, LLPDuring the course of assisting a financial technology client with raising growth capital, we wereintroduced to a unique method of financing that many businesses in the technology space havenever heard of before: “Revenue Based Financing.”In revenue based financing, the investor, or lender, provides funds to an organization and isrepaid not based on a level dollar amount or an eventual sell of the business, but based on asmall percentage of monthly revenue. Revenue based financing works well when a companydesires to continue to operate as an independent business or where a sale with a large cashpayout is not likely or desired. Naturally, the business needs to be generating some level ofrevenue, but it allows for fluctuations in sales and in essence, turns loan repayment from a fixedexpense into a variable expense.This type of financing is best considered by companies when there is a lack of hard assets thatcan be used for collateral. It also works well for companies with seasonal or unpredictablerevenue streams. For entrepreneurs, revenue based loans are typically structured in a way thateliminates dilution and control issues for the founders and there is generally not a board seat forthe lender or investor. The investment usually does not require a valuation of the business orpersonal guarantees from the owners. Revenue based financing is a viable option fororganizations that have operated without outside funding and allows for companies to growwithout the need to create an exit strategy – which benefits investors as well. The typicalpayback for these loans is three to five times the investment but, because a large exit is notneeded, there is less pressure on the company to hit a home run.Revenue based financing is not a fit for all organizations; however, it is an alternative thattechnology entrepreneurs should definitely consider. Please feel free to contact Arvil Stanford atPorter Keadle Moore, LLP if you are interested in learning more about revenue based financing. Contact Information Arvil R. Stanford astandford@pkm.com 404.420.5796

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