After several decades of very little change in the world of entrepreneurial finance, the past several years have seen the emergence of a number of new approaches to how small businesses fund their growth. While legacy solutions like equity-sales, factoring and SBA term loans certainly work well for a wide range of companies, there is a new wave of more creative growth funding solutions that are helping small business owners access the funding they need to take their companies to the next level.
One of the most company-friendly small business funding solutions that made a recent splash is revenue-based financing. Revenue-based funding is as simple and elegant as it sounds. Rather than sell a stake to an equity investor or get tied up in debt covenants and personal guarantees with a traditional loan, revenue-based financing allows a company to secure a large chunk of growth capital upfront and then repay the investment from a small, fixed percentage of future revenue over a three to five-year timeline. By utilizing a repayment model tied to future revenues, business owners can access funding by selling a fixed portion of their future revenues in an approach very similar to providing a royalty to an investor.
While revenue-based financing still remains somewhat of an undiscovered secret, the market is quickly taking notice. In Q2 2019, Lighter Capital released a report confirming that the revenue-based funding market has grown 10x over the last decade and in Q1 2019, Decathlon Capital announced the largest revenue-based financing fund in U.S. history with over $500 million in funding available to support growth-focused companies. Based on the recent momentum in the market, revenue-based funding approaches are likely to become a much more common approach to addressing the chronic challenge that many small business owners face when seeking growth capital. Like any financial landscape, different revenue-based investors tend to focus on different geographies or market segments so a small business owner should do some homework to evaluate different options and capital source providers to find the right partner.
For the following four companies (DynEd, Provengo, Redline Steel, Strategic Risk Associates), revenue-based financing was the key to the growth and ultimate success of their businesses. These company founders and CEOs were looking for growth funding without any dilution, and this alternative funding source was the perfect fit for them. Revenue-based financing is an emerging area of the market that you are certain to hear more about in the future.
credited to John Borchers, Decathlon Capital