Financial Modeling for Revenue Share Loans

This week we released a new feature on ProjectionHub to support an innovative financing model that many small businesses are now utilizing.  Our tool now supports financial modeling for revenue share loans.

How do revenue based loans work?  

A business will borrow a lump sum of money, let’s say $100,000.  Then each month the business will repay the lender a predetermined percentage of monthly revenue.

What percentage of revenue must you repay on a revenue share loan?

Typically, you might be looking at between 3% and 7% of monthly revenue as your repayment.

How long do you have to keep making payments on a revenue share loan?

Typically, you make monthly payments until you reach a maximum repayment which could be 1.5 times the original loan (in this case $100,000 x 1.5 = $150,000)

At ProjectionHub, we became aware of this financing solution through our partner LocalStake.  LocalStake blends crowdfunding with revenue based lending.  Many individual lenders can all come together and put their own funds behind a local business.  LocalStake closed their first deal in August of 2013 and since that time 5 companies have successfully raised over $1 million using the revenue share structure.

Advantages of Revenue Share Loans

According to Lighter Capital, one of the leaders in revenue based financing, this unique security can provide some distinct advantages over traditional bank loans and equity investment.

• Ownership is not diluted
• Repayment is flexible, if revenue goes down during a season, so will your payment
• The lender is aligned with the revenue growth of your business
• Business owners won’t be pushed for an exit like they may be from traditional investors

According to Ryan Flynn, one of the Founders of LocalStake, “Revenue share can work well for certain types of business because it creates a unique incentive structure for investors. While its technically a loan, investors can participate directly in the potential upside of the investment by being customers and advocates of the business. The more they help the business by buying their products and telling others to buy their products the more revenue the company makes which ties directly to the investor’s rate of payback. For the business, it almost functions as a marketing tool in addition to a financing option because investors are incentivized to be repeat customers and drive others to the business”

At ProjectionHub we think this is a very powerful financing tool for many businesses, so we are excited to release this new feature which will allow users to create financial projections that include revenue share loans in addition to traditional loans and investments.  Check out our financial projection web app here for free.