After last week’s post on Early SaaS Loans Before Bank Credit Lines, a couple people mentioned Lighter Capital as an alternative lender that does revenue-based financing. The idea is that instead of the normal venture debt model, which is interest plus warrants in the business, revenue-based financing takes a percentage of revenue over a certain period of time, typically five years.
With a starting point of $1 million in revenue, an annual growth rate of 30% per year, and a fee of 10% of revenue for a $500,000 loan, here’s how it might look:
- Year 1 – $1,300,000 in revenue, fee of $150,000
- Year 2 – $1,690,000 in revenue, fee of $169,000
- Year 3 – $2,197,000 in revenue, fee of $219,700
- Year 4 – $2,856,000 in revenue, fee of $285,600
- Year 5 – $3,713,000 in revenue, fee of $371,300
- Total fees (which includes repayment): $1,195,600
Simply doubling the initial money over five years results in a 15% internal rate of return, so borrowing $500k and repaying $1.2 million is just a bit higher when thinking of interest rates for a normal loan. I don’t know if this is exactly how Lighter Capital works, but I believe it’s directionally correct.
The next time an entrepreneur asks about alternative lending options, mention revenue-based financing as an option.
What else? What are some more thoughts on revenue-based financing for startups?
David Cummings on Startups 
Most of the revenue loan deals I have seen involve a percentage of revenue going forward devoted to repaying the loan, until some multiple of the original loan value has been reached, say 3X or 4X. Yes, interest at 10-15% on the outstanding balance is often included too, and is deducted from the quarterly payment before it is applied to the loan. As you point out it takes 2X over 5 years to give just a decent return, so risky loans ought to merit the 3,4, or even 5X return. We would ask the same of equity, no?