FAQ General
FAQ ROYALTY BASED FINANCE
– HOW MUCH GROWTH CAPITAL CAN WE GET?
Typically, $1M to $3.5M
– HOW DOES ROYALTY BASED FINANCE WORK?
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 month’s 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
– WHAT IS THE BASIC QUALIFYING CRITERIA?
Established company in business for 3-5 years. Annual revenue of $3M, gross margin of at least 30%. Proven management team that has a vested interest in increasing revenue and has a strong growth plan in place. Unlike an equity investment, success is based upon revenue growth, not an exit strategy
– HOW IS THE ROYALTY RATE ESTABLISHED?
Several factors are taken into consideration; internal rate of return required, size of the investment, strength of the management team, current revenue, past growth performance, feasibility of the proposed growth plan and other measurable factors.
– HOW LONG DO THE ROYALTY PAYMENTS LAST?
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
– HOW DOES RBF COMPARE TO DEBT FINANCING?
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.
– HOW DOES RBF COMPARE TO VENTURE CAPITAL?
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
– WHAT FINANCIAL INFORMATION DO YOU NEED?
Two Years of Historical Financials: Year End Balance Sheets, Statements Of Cash Flow, Profit/Loss Statements, Monthly Budget for Current Year, Two Year P&L Forecast. Reviewed or Audited Preferred, But Internal Statements Are Acceptable. If Available, Five-Year Business Plan
– IS ROYALTY BASED FINANCING JUST THE SAME AS “FACTORING” OR “RECEIVABLES FINANCING?”
No. Royalty based financing provides you unrestricted capital for growth in return for a small percentage of monthly revenues. “Factors” or “receivables financiers” expedite the cash flow from sales that already happened. Unlike Factoring, royalty based finance provides growth capital; not working capital. Royalty based financing imposes fewer restrictions and obligations on your workflow. Flexible payments rise and fall with revenue, and are paid monthly as opposed to daily or weekly.