No angel in sight? Is crowd-funding not an option? There is a source to raise cash for your business that you may have overlooked. Lighter Capital, a Seattle-based company, offers financing options for entrepreneurs–revenue-based financing. Basically, it is a revenue-based finance investment; it gives capital to a business by “selling” an ongoing percentage of a company’s future revenues to the investor. “A RevenueLoan is a type of debt financing for growing SaaS or tech-focused business,” Jonathan Saunders, Finance & Marketing, Lighter Capital, explains further. “There is no set interest rate or fixed payment. The monthly payment is a percentage of gross revenue so this means payments “flex” with a company’s revenue.” (Software as a service or SaaS is a software delivery model in which software and data are centrally hosted on the cloud.)
According to Saunders, this allows entrepreneurs to grow their businesses as quickly as possible. “The total obligation is considered fulfilled once cumulative payments equal an established repayment cap (usually 1.5 to 3.0 times the amount of principal). A small warrant is also required and the warrant expires one or two years after the obligation is fulfilled,” he says.
On average, businesses have taken loans of between $100,000 and $250,000, with most being paid back within three years at a rate of 15 percent to 30 percent annual interest. Thus far, according to Inc.com, Lighter Capital has lent around $2.5 million since its launch in November 2010.
So is the concept similar to the Bowie Bond in which artists such as the late James Brown, Ashford & Simpson and the Isley Brothers borrowed money based on their future royalties and earnings? Not exactly, says Saunders. “A Bowie Bond and a RevenueLoan are different types of financial instruments. The underlying collateral of a RevenueLoan is the future cash flow of a business; a Bowie Bond’s underlying collateral is intellectual property,” Saunders points out. “Another difference in these financial instruments is the Pullman Group; it securitizing assets like Bowie Bonds compared to Lighter Capital which is not securitizing RevenueLoans.”
Applying for a RevenueLoan is a relatively simple procedure. “The general process for companies that receive funding from Lighter Capital is a company applies online, analysis and due diligence are completed, and eventually a company is funded with an ACH directly into their bank account. The whole process usually takes between two and six weeks depending on how quickly a company desires to move along in the process,” says Saunders. (Automated Clearing House, or ACH, is an electronic network for financial transaction.)
On the downside, the financing is a little more expensive than traditional bank financing. And if the borrower is delinquent on the loan after a set time period, they could forfeit their business, patents, domain names and trademarks to Lighter Capital.
Still, for entrepreneurs who can’t find funding elsewhere, a RevenueLoan may be an alternative. “The benefits entrepreneurs receive with Lighter Capital’s style of revenue-based financing are the flexible monthly payments, no personal guarantee requirements, no dilution of ownership, and fast access to capital,” says Saunders. “Financing has become unavailable for many asset-light businesses such as SaaS or tech-focused companies. Raising equity financing can also be difficult and costly because venture capitalists need billion-dollar opportunities and exit strategies in order to provide funding. The second market reality is many SaaS or tech-focused companies need less capital in order to grow into successful businesses.”