Income based lending called tactical tool to achieve short term goals
According to revenue-based financing specialists, short-term goals that can make a difference in your growth should include short-term financing rather than expensive long-term debt or equity.
An e-commerce or retail business trying to increase inventory ahead of a key sales event, for example, should use cheap, short-cycle financing that doesn’t leave the business with an excess obligation.
“What we’re saying is rather than using super expensive equity or other options…where you’re investing in something short-term, use a more efficient source of capital,” says Asher Ismail , co-founder of online-based lender Uncapped.
Ismail, whose company specializes in e-commerce startups, says securing debt and traditional equity funds can take too long for companies that need to act quickly to capitalize on a short-term event that can help them grow.
“It’s different from when you sit in a bank branch and try to talk about a business plan, or try to pitch to venture capitalists,” Ismail said in a 2X E-Commerce Podcast. “You have endless meetings without necessarily knowing what’s going on.”
A key example is marketing, Ismail said. “If you put £1 on Facebook, and you know you will receive £3, it doesn’t make sense to give very expensive equity to fund this,” he said.
Uncapped, launched in London in 2019 with operations in the United States, is one of the new lenders to compete in the revenue-based financing arena. The patterns in space differ, but they tend to share one key feature: borrower repayments are tied to monthly income performance; if income increases, payments also increase; if they decrease, the payments also decrease. This reassures companies that, if they make a strategic error resulting in a drop in revenue, they will not necessarily face a payment default.
“Because you pay a variable on a monthly basis at a percentage of your gross cash receipts, you have no way of defaulting on a payment,” Novel Capital CEO Carlos Antequera told CFO Dive. “Because your payout is calculated as a percentage of what you get in cash, there’s no fixed payment you’re going to miss.”
Novel focuses on software-as-a-service (SaaS) businesses that generate recurring revenue or a combination of recurring and non-recurring revenue.
Lenders in the space also tend to share other business practices, including covenants, if any, and direct access to the loan seeker’s accounting software so they can base their underwriting decisions on the real-time business data that the company generates.
“We connect to data sources that the business already uses to operate,” Ismail said.
Since Uncapped’s borrowers operate in the e-commerce space, that means his business operates, in addition to their accounting software, their Shopify and Google AdWords accounts, and other similar platforms.
“We’re building a 360-degree view from that to make a data-driven decision in 24 hours,” Ismail said.
Companies hoping to exit with a major capital raise in another year might find financing a way to make operational investments that will allow 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 bolster its sales team before pursuing its first non-risk fundraiser. He used the short-term loan to hire a sales manager and build a team under that person.
“With COVID-19, their product just took off,” he said. “They were able to raise a very big Series A on this very good valuation. Those 18 months helped them get into a very good position while still retaining ownership. [The CEO] was able to show a much better metric for this next round.
One of Uncapped’s first clients was sustainable fashion brand Hedoine. Like many new e-commerce businesses, Ismail said, their growth has been held back by revenue limitations. They juggled their money between marketing and inventory, forcing them to wait until they had run out of inventory before they could invest in fashion for the upcoming season.
“They looked at venture capital, venture debt, but wanted something more affordable,” Ismail said. “They signed up for a £50,000 advances at the end of 2019 and used these funds to increase their inventory. With these new funds, in the first quarter, their income increased by 11,000% compared to the previous year. »
Regardless of the niche they operate in, revenue-based lenders tend to seek businesses with recurring revenue because they are predictable, sustainable, and repeatable, allowing them to underwrite quickly and without having to impose covenants. expensive performance.
“Looking at your predictable subscription revenue…that’s how we gain that level of comfort,” even for businesses that have a mix of recurring and non-recurring revenue, Antequera said.
Novel limits loans to 30% of the borrower’s annual income with a monthly income share of between 4% and 10%, depending on loan size and other factors. Uncapped charges a flat rate of 6% on a daily basis with no set-up fees or other charges.
” If you wanted £100,000, we would take a fixed portion of your daily income,” said Ismail, whose company operates in nine countries, including the United States and Canada. “It could be 5% or 10%, until we get £106,000 back.