For many small businesses, debt is a crucial element of the long-term expansion and sustainable growth strategy: taking on borrowing enables the firm to scale up more quickly than self-funding, boosting revenues and accelerating the journey to profitability.
However, businesses are often nervous about borrowing early on in their development — particularly loans structured conventionally, which require fixed repayment of capital and interest each month, irrespective of performance. They worry about their ability to service the loan if revenues dip unexpectedly or during a seasonal lull, say.
Revenue Loans explained
Revenue Loans address these concerns. Relatively new to the UK, this form of finance is well established in the US small business funding ecosystem. It will be highly successful in this country too and BOOST&Co is leading its development.
The principle of a Revenue Loan is simple: the amount the business pays back each month is a set percentage of revenues. In good months, the business pays back more, while in leaner times, the repayment is scaled down. The duration of the loan depends on the performance of the business, but is typically between three and five years.
It’s a great product because it provides the flexibility businesses need to grow.
What lenders look for
Lenders look for businesses with a history of recurring revenue and make Revenue Loan offers on the basis of these statistics. Those recurring revenues might be contractual —monthly license fees paid to a software provider that has clients using its products and services, for example. Or they might be statistical — calculated on the basis of past trading performance where there are lots of clients.
For this reason, Revenue Loans work particularly well for tech businesses, where recurring revenues are common (for example, software-as-a-service revenues, or freemium models). These generate high quality past performance data that a lender can use to assess the business’s trading history — and its likely rate of revenue growth.#RevenueLoans work particularly well for #tech businesses, where recurring revenues are common. Click To Tweet
Revenue Loan details
The detail of the loan will vary from lender to lender. At BOOST&Co, we’re looking at loans up to 33% of the value of the business’s annualised recurring revenues. The business then pays back a small portion of revenues — 2 to 7% every month.
How long the business takes to repay the loan in full will depend on how quickly its revenues grow.#RevenueLoans provide the flexibility businesses need to grow. Click To Tweet
How the loan works in practice
Simplicity is powerful! Imagine a growing business generating recurring revenues of £200,000 a month, which expects to grow at 5% a month. The business’s projections suggest new sales and marketing team could add £100,000 of additional revenue to that figure each month, but it doesn’t have the cash to recruit.
Instead, the business secures a Revenue Loan worth 25% of its annualised monthly recurring revenue, or £600,000. It repays 5% of its monthly income. Based on expectations of growth and expansion, this will take 38 months at a cost of £180,000.
Using the loan proceeds, the company hires the sales people it needs and achieves its sales growth objectives. Over the next five years, the firm generates additional revenues of £6m. It’s a pretty good return on investment!
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