Community Economic Development Fund

Articles and podcasts to help plan and operate your enterprise.

Is revenue-based financing right for you?

by Frederick Welk
CEDF Business Advisor

Among the options available to small businesses, revenue-based financing (RBF) seems to be getting more attention recently. It’s structured like a loan and the repayment is tied to a percentage of the company’s monthly revenue. The main attraction for entrepreneurs, accordingly, is that it’s promoted as a way to finance rapid growth without giving up equity and control.

These loan products are marketed through niche lenders. And like much in the internet age, the promise is that the deal can be done quickly and with less documentation.  But as we shall see, they are much more expensive than conventional financing through a bank or a nonprofit lender, such as CEDF.

I love creative financing concepts.  I bought my first business using an arrangement somewhat related to RBF (but on much more reasonable terms).  But, these costs reminds me a bit too much of the “easy internet lenders” that we warn about at CEDF.

Looking at some of the funders’ websites showed some variety in the terms. The minimum monthly revenue of the business might range from $15K to $30K. Maximum funding was listed as 1/3 of annual revenue in once case and six times monthly recurring revenue in another. To qualify, businesses have to have gross margins better than 50%.  This is because if one has to budget 3% to 10% of monthly revenue (debited out of your bank account) to repay the financing, there had better be enough profit left over to run operations.

The term repayment cap is used to describe the total cost of capital. This can range from 1.3 times to 3 times the amount borrowed. On the low side that would mean repaying $65K on a $50K loan or even $150K on the same $50K financing.  A three-year $50K SBA Microloan at 7.5% would have a total repayment of $55,991, which equates to only 1.12X the financed amount. The terms are said to be three to five years, which is comparable to an SBA Microloan. So one can see there is an enormous cost associated with the corner-cutting that an RBF might provide when it comes to the application and qualification process.  

Of course, it might be comforting to think that as revenue fluctuates the repayment commitment will flex too.  But the lenders have baked this into their own qualifications. That’s why they are offering to fund businesses with subscription-based or other stable revenue sources.

Bottom line is that old-fashioned loans from banks or alternatives from community lenders are still the least expensive way to borrow, unless of course, your Uncle Bob is simply willing to forgive your debt.

What would your employees say?

I stopped at one of my favorite spots early one morning recently before my first client meeting. That happened to be the Chick-Fil-A in Brookfield, CT.  You might know the owner-operator, Devon Scanlon, from our Small Business As Usual podcast 19-1  or her participation in our Women’s Business Success conference.

Right click/View image to enlarge

What I noticed on the wall that I hadn’t seen in previous visits was a framed whiteboard with inscriptions from 26 of her employees. Devon later told me the idea was just an inspiration they came up with locally last November to recognize the season of being thankful. They loved the result so much they decided to post it in the dining room.

If you study the messages, you find some touching expressions of the staff member’s appreciation of working on a great team, finding a second family, making friends and memories and being able to work toward greatness. Some talked about being thankful for vital life lessons, or the chance to better themselves and work toward owning a business. Others mentioned a vibrant atmosphere, great attitudes and an awesome environment.

Reading these genuine messages, I was even more impressed than I already had been with Devon’s operation (and the chain in general, which I have previously mentioned in these articles). But I saw something else, an implicit challenge awaiting any small business owner who dares to find out – What would the employees of your business say if given the chance?

Would they pour out similar sentiments? Would the invitation be greeted with polite silence and ignored?

There are probably other ways to test the engagement and cohesiveness of an organization. And to be clear, although great leadership is required to build a great culture, the expressions didn’t mention the boss. Co-workers can certainly be devoted to each other while hating the boss. But I don’t think that’s the case in Brookfield.

If you’re looking for a checklist to evaluate your business culture, here’s a good list to start with.

-- Frederick Welk
CEDF Business Advisor

 

$10,000 for your soul

Millions of people love Amazon for the instant gratification, the almost universal selection and the typically good pricing the platform offers. Uncountable others, including current and former Amazon merchants or hometown businesses who feel the giant has squashed their formerly prosperous Main Street or online businesses, think Amazon is the devil.

Here at CEDF, I’ve served two clients as a business advisor who rode a roller coaster of excitement and then despair over their relationship and Amazon’s opacity, inequitable policies and kafkaesque behavior. Without dwelling on the technical details of their frustrations, one walked away from literally millions in future purchase orders in order to protect the pricing integrity for its hard-won conventional channel partners. Another fought product diversion abetted by the colossus, and later came to the realization that when selling direct to Amazon, the purchase orders the leviathan was placing were being outpaced by returns from other Amazon warehouses. On a net basis, Amazon owed the client money and it wasn’t paying too fast.

Now these may be exceptional circumstances.  But there is enough written in the business press to make it clear that an Amazon relationship can make or break a business and not everyone is happy.

As an aside, when I’ve made presentations for SCORE about getting one’s business on the internet, few people in the audience realize that two-thirds of the sales on Amazon are from independent sellers.

Many entrepreneurs feel their brand, which they may have sacrificed for and nurtured for years, represents the soul of their company. How much would you sell your soul for? This article explains the little-known Amazon Accelerator program which can boost a merchant’s visibility beyond your wildest dreams, but with a catch.  Amazon can buy your brand on 60-days notice for $10,000.  Would you take that bargain?

-- Frederick Welk
CEDF Business Advisor

 

 

Small Business As Usual 19-6, emotions behind money

Corrin Gibbs Burke

Problems in business with money? Maybe it's all in your head. Corrin Gibbs Burke CFP®, CMC®, explains the emotional side of what none of us can live without, and how using archetypes helps us understand pitfalls and tendencies that interfere with small business success.

 

 

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