Jim Verdonik founder of Innovate Capital Law
Capital Talks are a series of conversations Jim Verdonik is having with interesting people about anything he wants to talk about.
Jim Verdonik will talk with Benji Jones Revenue Share Loans in three parts: the Good, the Bad and the Numbers.
Viewer discretion is advised.
In this session Jim and Benji talk about: Why Benji Loves Revenue Share Loans for financing growing businesses.
JIM: I’m here with my partner in Crowdfunding Crime Benji Jones.
JIM: Benji recently returned from a speaking engagement at a West Coast conference about Crowdfunding.
JIM: What’s the hottest new type of security businesses are using to raise growth capital?
BENJI: The conference was buzzing about Revenue share loans. It’s not an exaggeration to say that the Crowdfunding world is falling in love with Rev Share loans.
JIM: I notice that you’re wearing a button. What’s the Button say?
BENJI: You know me. I’m never half-hearted about anything. My button screams: #ILOVERevShare
JIM: Can you tell us why people love Revenue Share Loans?
BENJI: Revenue Share loans are attracting interest from both accredited and non-accredited investors in Regulation CF and state crowdfunding offerings.
JIM: I’ll tell our audience what Rev Share is about before you dive into the details. A revenue share is a loan that is paid back over time by the borrower “sharing” a percentage of its “revenue” at regular intervals until it has returned to the lender a fixed multiple of the amount loaned. Benji, how about giving us an example?
BENJI: Let’s say a local brewery or restaurant or software company needs $500,000 to expand. The business borrows $500,000 from investors with a promise to return to them a fixed amount (say, 1.5x or 1.75x the amount loaned) over time.
JIM: That sounds pretty simple.
BENJI: It really is. The business pays off the loan by paying investors a percentage of its revenue in installments until the fixed return (in this case $750,000) has been repaid. As an investor, you would receive your pro rata share of such payments based on the amount of money you loaned the business.
JIM: Are there any variations in terms?
BENJI: The percentage of revenue the business pays can vary widely based on projected revenue and operating profit. The business’ repayment obligation could be open ended (meaning the loan remains outstanding until the stated return is met), but more often the payback amount must be repaid in full within a specific time window (say 3 to 5 years). Having a definite end date may require the business to make a “balloon payment” at the end of that period if there is any shortfall.
BENJI: Tell us about risks to investors.
JIM: As with any investment in a security, investors risk losing their investment – especially since many issuers are small or new businesses. But many retail investors like an immediate monthly or quarterly investment return. They don’t like waiting five to ten years for an equity investment to hit a home run. Every dollar an investor gets back in monthly payments reduces investor risk. In some situations, investors can make a profit even if the company later goes out of business.
BENJI: Are Revenue Share loans totally new?
JIM: Rev Share isn’t a new concept. It has been used in the oil and gas industry, real estate and film and music industries for years. Franchising, and even share cropping, are other forms of Rev Share that long preceded Crowdfunding.
JIM: So, Benji. Can you tell us about the size of the Rev Share market and where the most Revenue Share deals are being done?
BENJI: Crowdfund Capital Advisors recently released data focusing on the “small but significant group” of companies utilizing Rev Share to raise capital under Title III of the JOBS Act under Regulation Crowdfunding. The numbers they cite are impressive. Picking up on this trend, Startwise.com, the newest FINRA approved Regulation Crowdfunding platform, is specifically targeting Rev Share, allowing anyone (not just accredited investors) to invest in businesses for as little as $100. LocalStake has been featuring Rev Share for the small businesses it helps raise capital for several years.
JIM: That’s exciting news.
JIM: I understand that in many situations Rev Share loans can serve dual purposes. Can you tell us how businesses can use Revenue Share loans both to raise capital and attract and keep customers?
BENJI: You’re right. Rev Share loans can be a great win-win for investors and small businesses – particularly those businesses that are close to, or already have a history of, producing revenue. Take our brewery example, as an investor if you know that you basically get a dime (or a quarter for expensive beers) for each beer the brewery sells each month, then it’s not hard to imagine where you will go for happy hour on Friday afternoons; whether you might buy that extra round for your friends while you are there or where you recommend your neighbor buy the keg for the next Labor Day cookout.
JIM: So, are you saying that Rev Share loans can be like a customer loyalty program?
BENJI: Exactly! Rev Share creates an incentive for investors to buy a company’s products and services and to become marketing ambassadors for the business, which in turn builds revenue the company needs to repay its loan. Getting repaid money when you buy a product is a whole lot better than collecting airline points you can’t ever use.
JIM: Please go on.
BENJI: Crowdfunding is mostly about giving ordinary people the chance to invest in businesses (and products and services) they love. Rev Share builds brand loyalty and incentivizes customer-turned-investors (who are already committed to the business) to buy more products and services and to encourage their friends, neighbors and colleagues to do the same. This in turn increases the company’s revenue and, potentially, allows the company to pay the loan faster and at a higher ROI for its investors. So, when all the stars align and things work as planned, Rev Share is an optimal solution for companies seeking capital and customers-turned-investors looking to support the businesses they love while having access to a relatively quick and decent ROI.
JIM: But I to have say Benji, that you seem to be one of Rev Share’s most enthusiastic supporters. Tell us: WHY do #ULOVERevShare.
BENJI: As the poet said: “Let me count the ways.”
Here are the top 10 reasons we LOVE Rev Share for crowdfunding offerings:
- Rev Share is NOT equity. Investors are not buying any ownership interest in the business. Investors who purchase Rev Shares have no rights to vote or control management.
- Rev Share investors are creditors, not shareholders or owners. There is no “messy cap table” as a result of investment crowdfunding offerings. Once the promised return is paid, the obligation is cancelled and any contractual relationship between investor and the business is terminated.
- Rev Share is NOT dilutive. Rev Share doesn’t dilute the ownership, control or economic interest that small business owners (and their core investors) have in the business.
- Rev Share avoids setting a “valuation” on the business. The company does not need to set or negotiate a valuation of its business to sell Rev Share.
- Rev Share offers investors liquidity and immediate ROI, assuming the business is close to or producing revenue. The quicker the obligation is paid, the higher the ROI.
- Rev Share does NOT require an exit strategy. Most small businesses considering investment crowdfunding are run by owners looking to grow the company long-term and stay true to their business’ core mission. They usually aren’t looking to have a near-term exit (by selling the company or going public). With Rev Share investors do not need to wait for an exit to earn ROI.
- Rev Share reduces default risk. With a Rev Share loan the amount a company owes each measurement period varies solely based on the amount of revenue it generates. This reduces the chance of default when compared to traditional loans where the borrower must find cash to service set interest and principal payments on a regular basis or risk default (and the bad things that accompany missed payments) irrespective of how its business is doing.
- Rev Share is based on projected cash flow and is good for companies with seasonal or variable sales. Since Rev Share is based on projected cash flow, it’s a really interesting alternative for companies that have wide seasonal cash flow swings. Extreme seasonal examples would be Christmas tree farms and beach bars. During months with higher revenues, they can repay more of their debt. On the flip side, when sales are slower, their repayment would be less.
- Rev Share has benefits when compared to traditional bank financing. While it’s true that the cost of this kind of loan can be more expensive than traditional bank financing (i.e., the implied interest rate paid to investors is higher than what a bank might charge), many small businesses that are good Rev Share candidates are not ideal candidates for bank financing. In addition, a business using a Rev Share loan typically avoids bank requirements for collateral, personal guarantees, security interests on assets and other financial covenants.
- Rev Share is stackable. You can combine Rev Share loans with other types of financings to fund a single project. For example, a business can raise capital through an accredited investor equity offering, a secured bank loan or equipment financing loan in addition to a Rev Share offering (if the other investors and bank permit).
JIM: That sounds like a pretty good deal. But isn’t there a downside.
BENJI: Of course there’s a downside, but let’s not end this discussion on a downer.
Let’s do that in another discussion.
This is Jim Verdonik signing off until our next Capital Talk.
This article is one of a series of three articles that discuss Revenue Share Loans in detail. You can find our other two articles at:
Why Investors and Businesses May Not Love Revenue Share Loans
Crunching Revenue Share Loan Numbers
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