Short-term goals that can make a difference in your growth should include short-term funding rather than expensive, long-term debt or equity capital, revenue-based financing specialists say.
An ecommerce or retail company that’s trying to boost inventory before a key sales event, for example, should use cheap, short-cycle funding that doesn’t leave the company with an overhanging obligation.
“What we’re saying is, rather than use super-expensive equity, or other options … where you’re investing in something that’s short term, use a more efficient source of capital,” says Asher Ismail, co-founder of online-based lender Uncapped.
Ismail, whose company specializes in ecommerce startups, says getting traditional debt and equity funds can take too long for companies that need to act quickly to capitalize on a short-term event that can help them scale.
“It’s different from when you sit in the bank branch and try to talk about a business plan, or try to pitch to venture capitalists,” Ismail said in a 2X eCommerce podcast. “You have endless meetings without necessarily knowing what’s happening.”
A key example is marketing, Ismail said. “If you put £1 into Facebook, and you know you’re going to get £3 back, it doesn’t make sense to give away really costly equity to fund that,” he said.
Uncapped, launched in London in 2019 with operations in the United States, is one of the newer lenders to compete in the revenue-based financing space. Models in the space differ, but they tend to share a core feature: borrowers’ repayments are tied to monthly revenue performance; if revenues rise, so do payments; if they decline, payments decline, too. That gives a measure of comfort to companies that, if they make a strategic mistake that causes their revenues to fall, they don’t necessarily have to face default as a result.
“Because you’re paying a variable on a monthly basis at a percentage of your gross cash receipts, there’s no way for you to default on a payment,” Carlos Antequera, CEO of Novel Capital, told CFO Dive. “Because your payment gets calculated as a percentage of what you get in cash, there’s not a fixed payment that you’re going to miss.”
Novel focuses on software-as-a service (SaaS) companies that generate recurring revenue or a mix of recurring and non-recurring revenue.
Lenders in the space also tend to share other business practices, including limited, if any, covenants, and direct access to the loan applicant’s accounting software so they can base their underwriting decisions on real-time business data the company is generating.
“We connect to the data sources that the business already uses to run,” said Ismail.
Since Uncapped’s borrowers operate in the ecommerce space, that means his company taps into, in addition to their accounting software, their Shopify and Google AdWords accounts, and other similar platforms.
“We build a 360 degree view off the back of that to make a data-driven decision in 24 hours,” said Ismail.
Companies hoping to go out with a major capital raise in another year or so might find the financing a way to make operational investments that will enable them to seek a higher valuation when they finally reach out to investors, Antequera said.
About a year ago, Novel worked with a startup that wanted to boost its sales team before pursuing its first non-venture capital raise. It used the short-term loan to hire a sales chief and build a team under that person.
“With COVID-19, their product just took off,” he said. “They were able to raise a very large Series A on that really good valuation. Those 18 months helped them get in a really good position while they retained ownership. [The CEO] was able to show much better metric for that next round.”
One of Uncapped’s first customers was sustainable fashion brand Hedoine. Like a lot of new ecommerce companies, Ismail said, their growth was hemmed in by limitations on their revenue. They juggled their cash between marketing and inventory, forcing them to wait until they sold out their inventory before they could invest in the upcoming season’s fashions.
“They looked at venture capital, venture debt, but wanted something more affordable,” said Ismail. “They signed up for a £50,000 advance at the end of 2019 and used those funds to increase their inventory. With these new funds, in Q1, their revenues grew 11,000% compared to the previous year.”
Whatever niche they’re operating in, revenue-based lenders tend to look for companies with recurring revenue because it's predictable, sustainable and repeatable, enabling them to underwrite quickly and without having to impose onerous performance covenants.
“Looking at the predictable revenue from your subscriptions … is how we gain that level of comfort,” even for companies that have a mix of recurring and non-recurring revenue, said Antequera.
Novel limits loans to 30% of the borrower’s annual revenue with a monthly revenue share of between 4% and 10%, depending on the size of the loan and other factors. Uncapped charges a fixed 6% on a daily basis with no application or other fees.
“If you wanted £100,000, we would take back a fixed portion of your daily revenue,” said Ismail, whose company operates in nine countries, including the United States and Canada. “It might be 5% or 10%, until we get £106,000 back.”