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As the name suggests, repayments of revenue share loans are a function of the borrowing company’s revenue. In that way, revenue share loans are like merchant cash advances. However, the duration, cost, and terms of a revenue share loan make them more flexible and useful than most merchant cash advances.
Revenue share loans are less common, though. Merchant cash advances are readily available online through a short and simple application process. You typically need to undertake a private placement of a revenue share loan, which adds time and cost to the process. For that reason alone, revenue share loans are usually for companies that have revenues north of $200,000 per year who seek to raise tens or hundreds of thousands of dollars.
Revenue Share Loans Are Mezzanine Debt
Revenue share loans are a form of “mezzanine” debt. That is, they lie somewhere between equity and traditional debt, such as a bank loan. Revenue share loans are more flexible and expensive than traditional debt but are less expensive and flexible than equity.
Assume the following:
- Your business will have $240,000 of revenue this year, and you expect it to grow by 15% per year for the next several years.
- A revenue share loan is available with a payback multiple of 2.0, and a target loan duration of 4 years assuming a remittance rate (or revenue share) of 8.0% of monthly revenue.
- Given the preceding, you can borrow up to $55,000. That means you’ll repay a total of 2 x $55,000 = $110,000 over the course of 4 years.
- The implied annual percentage rate (excluding placement costs) of the loan is 32%.
- If you end up growing at, for instance, 5%, you’ll still be able to repay the loan in 5 years. In that case, the APR will actually fall a bit to 28% (since you’ll have use of the money for an additional year at no extra cost).
Download the Spreadsheet
Download the Revenue Share Loan spreadsheet to experiment with how the duration and cost of a revenue share loan vary with different assumptions regarding loan amount, revenue, revenue growth, revenue share, and payback amount.