Revenue Based Financing (“RBF”) is a cross between equity investment and debt financing. It encompasses the best attributes of these investment types for both the entrepreneur and the investor. For the entrepreneur, it provides capital that is paid back over time like debt. Unlike traditional debt it doesn’t require personal guarantees or collateral, and the payments vary based upon your sales. For the investor, it provides equity-like returns over the short term. Unlike traditional equity, when you pay back the investment plus a pre-negotiated return, the investment is done and the investor is not on your capitalization table permanently.

The investment is repaid over time (in our case, we are aiming for 3-5 years) through a percentage of your revenue (we call this the “Revenue Rate”) until the pre-negotiated return (we call this the “Investment Return”) is reached.

The Revenue Rate is the percentage of your revenue (actually Cash Receipts - see below) that is used to pay down the Investment Return each month. This payment varies based on the amount of Cash Receipts you have each month but the percentage stays consistent. We aim for the percentage to be between 3-8%.

Although it is called Revenue Based Financing, to save everyone (entrepreneurs and investors) a huge headache of figuring out GAAP Revenue every month and to enable you to manage your cash flows more easily, the payment is actually taken from Cash Receipts (i.e. customer payments). This system results in larger payments being made when your company has more actual (not financial) cash and smaller payments when less cash is available.

The Investment Return is the total amount that your company pays over the life of the investment. This amount is negotiated up front between you and Sage. We generally look to receive 2x to 3x our initial investment (i.e. we invest $100K than we would look to receive $200K to $300K over the life of our investment).

The variability of the payment which is tied to actual cash received can be very helpful for an early stage company that is trying to manage its cash. For example, in some months, your company might have minimal sales. With a traditional loan you would still owe your fixed monthly payment. But with an RBF investment, your payment would be reduced. Likewise, when your company has a larger sales month, and therefore more cash in the business, you can make a bigger payment. Very simply, when sales go up, the payment goes up; when sales go down, the payment goes down.

Yes and No. RBF is certainly more expensive than a bank loan, and we recommend you get a traditional bank loan if you qualify for it and are willing to secure the loan with personal guarantees and security interests in your assets. However, if a bank loan isn’t available to you under terms you find acceptable, your alternative is to sell stock. An RBF investment isn’t expensive if you compare it to a typical Angel investor who is looking for a 10X return on their investment, will impose a number of constraints such as board seats, and will remain on your cap table until you reach an exit.

Unlike a traditional equity investor, RBF doesn’t need or seek an exit (i.e. sale of the business or IPO). The Investment ends when your company has repaid the Investment Return. This can happen at any time during the life of our Investment.

Our investment does have a due date by which time the entire Investment Return must be paid. In the event you reach the due date and funds are still owed, then we have the option to either demand payment or to convert any unpaid Investment Return into stock.

Unlike many RBF investors, we do not secure the investment with personal guarantees, UCC filings or other restrictions. This preserves your ability to arrange other financing. And unlike other RBF investors, we do not maintain an equity ownership after the Investment Return has been reached.

As described above there are a number of key variables that impact the investment: the Revenue Rate, the Investment Return and the timeframe over which the investment is redeemed. These variables all factor into the pricing that we offer and can be adjusted to meet both the needs of the entrepreneur and Sage’s investors. During the due diligence process, we will ask what is most important to you: Total amount repaid? Timeframe of the investment? Size of the Revenue Rate? We then offer terms incorporating those preferences.