FAQ ROYALTY BASED FINANCE
Growth capital is provided up-front in exchange for a percentage of a company’s monthly top-line revenue. It is like a revenue sharing plan. The royalty rate is typically fixed at 1-5% of the top-line revenue. Since the royalty rate is a fixed percentage, the monthly payment is variable. For example, if the company bills $500k and the fixed royalty rate is 3%, the payment for that month is $15,000. If next months revenue drops to $o, the royalty payment is $o. Unlike traditional debt, the payment plan is flexible and adapts to your business model. RBF is aligned with your top-line revenue targets. You are not penalized for slow months or seasonal circumstances
If there is a pre-defined royalty cap, the royalty ends when the royalty cap is paid. If there is no royalty cap, the royalty is paid continually. Buy-down and buy-out of the royalty is optional. Depending upon the structure of the deal, the royalty payments usually last 4-6 years. RBF is flexible, unlike debt which requires a mandatory principal repayment structure
Banks generally do not provide pure growth capital to emerging businesses. RBF is designed for major expansion initiatives, over and above working capital needs. Unlike typical term loans, payments are variable, and determined by the revenue performance of the business. There is no interest rate or fixed loan period. No collateral, personal guarantees, rigid terms/payments, restrictive financial covenants, default provisions or FICO score. Assets are not tied up and subject to foreclosure. RBF is always aligned with the interests of the entrepreneur.
Venture capital is expensive and cumbersome compared to RBF. The VC is looking for a 10-20x return. With RBF you keep 100% of your equity and maintain control of the company. The VC’s success is dependent upon an exit strategy typically within 5 years. With RBF your success is dependent upon revenue growth