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MainStreet) -- What do bouncy castles, online yoga classes, online medical-solution software, a chocolatier and social media tools have in common? They're all businesses that have been funded through revenue-based financing.
Lighter Capital specializes in revenue-based financing. In just over a year since it launched, the company has done 20 transactions in 14 companies totaling roughly $2 million through its RevenueLoan product. The company mainly invests in software and high-margin, high-growth companies like software firms, but also seasonal businesses.
A lighter side of capital: revenue-based loans offer an alternative to bank lending.
Rob Belcher, Lighter Capital's vice president, explains what revenue-based financing is and how to make it work for your company.
How does revenue-based financing work?Belcher: Revenue-based financing is a loan [where] we get a percent of revenue going forward until the loan principal is repaid plus interest. Payment is variable and it fluctuates in any given month. That's the beauty of the royalty of the revenue-based financing. The payment is based on a royalty or percentage of revenue.
We invest $50,000-$500,000 and that generally is into companies that are doing at least $300,000 in trailing 12-month revenue up to $5 million in revenue. Obviously that means that they've got to have revenue, [it's not for] pre-revenue startups.
What do these companies generally use the funds for?Belcher: [The company] had a boost in sales and funds are tied up [to execute]. They are poised to explode on the sale and revenue front and need to hire a salesperson or marketing campaign. Those are generally good use of funds on the model.
We tend to lend 10%-30% of a company's annual revenue.
The model works very well with companies that are high growth -- 50% growth margins or better -- and able to scale their sales.
It's not a good use for working capital because working capital doesn't grow sales. The core use of our [loan] is sales or marketing related.
To some degree working capital constraints are a good fit for us when it means you have more sales that you are making but you're not getting paid yet, but you have expenses. If you're a pretty flat business and you need working capital, that's not a good business.