Revenue loans are an increasingly common way for businesses to fund their growth.

You might be wondering, from a legal perspective, how is a revenue loan different from a regular loan? How is it similar?


What is a Revenue Loan?

A revenue loan is a form of financing where a lender loans funds to a business and receives payments based on a percentage of the business’ ongoing gross or net revenues. The loan is paid off when the lender receives a multiple of the amount of the loan (e.g. 1.5X).

Consequently, a borrower’s payment amounts fluctuate over time, depending on their revenue. Sometimes, this is called royalty-based financing, because the monthly payment amount resembles a royalty.

Revenue loan agreements include many of the same terms found in as traditional loan agreements, such as:

  • A description of the amount of the loan
  • Closing conditions
  • Repayment terms
  • Maturity date
  • Grant of a security interest
  • Representations and warranties
  • Covenants (both positive and negative)
  • Events of default
  • Remedies
  • Venue, jurisdiction and dispute resolution terms

Terms unique to revenue loans include the following:

The monthly payment amount is determined based on the prior month’s gross or net revenue. Thus, the definition of net revenue is important, as well as the rate applied to net revenue to determine the monthly payment.

  1. Because the monthly payment amount varies based on the borrower’s prior month’s revenues, calculating the amount of each monthly payment that is ascribable to principal and the amount that is ascribable to interest is not as straightforward as in a regular loan, and involves complex calculations.
  2. The revenue loan is paid in full when the lender has received a multiple of the amount of the loan (this varies, but is usually 1.35–1.8x the amount of the loan).
  3. Because the repayment terms of revenue loans are made based on the borrower’s underlying gross or net revenues, lenders will usually require audit rights to confirm they are being paid the right amount.
  4. Sometimes, revenue loans contain a success fee if the company is sold during the term of the loan, or within a certain period of time after the loan is repaid (i.e., there might be a “tail” on the success fee).
  5. Sometimes, revenue loans contain an early buyout right for the borrower.

 

What kinds of companies can borrow via a Revenue Loan?

This type of financing might be available to companies that do not have the financial history or collateral a traditional bank loan would require, yet have strong revenue-generating businesses. It may also be preferable for businesses that do not want to dilute their ownership in an angel or venture financing.

 

What are the main borrower eligibility requirements?

The main eligibility requirements that a borrower would be expected to meet are that the business must generate revenue and it must have strong gross margins to support the loan payments and the borrower’s business operations. Recurring revenue streams from subscriptions and contracts are a plus.

 

What borrower information is typically requested by a lender?

A borrower will usually be expected to provide the following information to a lender:

  • Historical financial information (such as profit and loss statement, balance sheet and cash flow statement)
  • Growth projection
  • Top customers’ information and standard contract used
  • Product or service overview
  • The amount of funds needed and their intended use

A revenue loan presents an alternative financing solution that may be more desirable or suitable for some businesses. The unique structure of the loan is attractive, and they will probably become a lot more common in the years to come.

 

Guest blogger Joe Wallin is a leading startup lawyer in the Pacific Northwest and the founder of the Law of Startups. He represents companies from inception to exit, as well as investors, executives, and founders. His practice focuses on startups and emerging companies, angel and venture financing, and M&A transactions. Follow him on Twitter @joewallin