Like most VC backed business models it has some hidden aspects which could shape a founders decision making process, which in our ecosystem are not widely discussed, mostly due to sheer inconvenience and complexity.

Early Stage Friendly?

Revenue Based Lenders always check for revenue growth before underwriting, with every single provider bringing a unique AI or technique or data approach to support their market thesis.

It is important to understand how all lenders will assess companies, what data you will need to provide them, and whether that data will be captured long after you have stopped using their solution.

Most will focusing primarily on revenue growth derived from predictable performance on marketing channels, LTV:CAC. It is about funding the future potential based on the commercial data available at a point in time.  

Most revenue-based lenders will require at least a year of trading and a few good months of data disqualifying most newly established businesses with early traction, point at which the have the lowest valuation when they fundraise.

Benefits and Perks

I find it absurd that you can get more benefits from your local bank than from taking expensive capital from a Revenue based lender.

Many providers have some subsidised services such as branding, advertising, and marketing consultancies, but overall, it is hard to look at this ecosystem and think that you are getting good value for your money.

The founders of such organisations invest quite a substantial deal in themselves, thus making them appealing to your emotional core, as aspirational figures.

The key question is what else do you get with a minimalist website, a standard application process and terms you cannot negotiate?

Transparent Pricing

After close to ten years in finance and investment the most frustrating aspect of all is in my view Pricing.

Revenue-based financing solutions have a very high cost of capital, usually it varies around 18% - 40% on an annual basis, which makes companies in the space incredibly attractive to institutional investors such as banks, pensions, and investment funds. They can achieve a high level of return for their capital without the risk of a venture capital equity fund.

The pricing however is not presented in a transparent way to founders who may or may not be aware of the intricacies of finance. Most of the time such solutions will have a fixed fee which can be as low as 6% or as high as 12% in Europe and a bit less in the US.

The client will only pay a percentage of their total revenues back to the lender until the facility is paid in full. Typically, this is between 10% and 25%, depending on the risk rating and stage of the company.

If you look at the cost from this angle, then they are neither cheap nor transparent. I dread thinking about the advertised impact such a facility has in a company will a low gross margin or limited runway, or a company hit by an external factor, as we would have all seen in lockdown.

The Magic Mousse

I have learnt a long time ago that business is about perception.

Lenders in the space have a unique approach, they are perceived open and inclusive, but in fact they filter out quite a great deal.  The goal is not to help a blatant gap which is formed in the market between the bootstrapper, and venture backed companies.  

Many lenders will have their magic mousse, they own algorithms which will capture only clients with incredible growth potential, thus only limiting their exposure to risk for 3 to 4 months, point at which most companies should be able to pay their loans from the increased revenue. The better the company the quicker the payment of the facility, the more expensive the capital. Brilliant, right?

It is a flexible approach as founders with poorer performance will not have the pressure of paying back the facility before a specific term. Although those companies will be in a poorly performing portfolio. There is the danger that after a period lapsed the small print will have some clever clause which will penalise the borrower.

I wonder if this is the key to growth or whether this is potentially the pathway to irresponsible lending.

What is the company envisages using multiple products per year, or increasing the facilities? Are they made aware of the true cost of capital on an annualised basis? How are these lenders de-risking the market, or making it more sustainable?

There is more to Revenue Based lending than just a fixed fee, sometimes triggers which enable them to apply an actual interest, warrants, conversion mechanisms. How about facility fees or some other terminology for the masses to be confused by?

As founders, I think it is important to ask questions, to read the small print and to request none of our company data to be used after we have finished paying a finance facility.

To be investigative, is not about being anti-establishment, but to be smart about the decisions in front of you, and to require a higher standard in our financial market and above all integrity.