Why revenue-based finance could work for your business

Sydney-based start-up Shoeboxed Australia is encouraging other SMEs to consider revenue-based financing, after raising $150,000 in a bid to boost its sales and marketing efforts.

Shoeboxed Australia, founded by managing director Simon Foster, claims it is the easiest and fastest way to organise receipts and business cards online, thus eliminating paper clutter.

It is an offshoot of US-based company Shoeboxed.

After raising an initial seed round of $250,000 – from friends, family and several unnamed investors – Shoeboxed Australia has raised an additional $150,000 in growth capital.

These funds are the result of revenue-based financing – a type of financial capital that can be made available to small or growing businesses.

Revenue-based financing (RBF) investors inject capital into a business in return for a percentage of ongoing gross revenues until the capital amount, plus a multiple, is repaid to the investor.

Most RBF investors expect the loan to be repaid within four to five years of the initial investment.

RBF is often described as sitting between a bank loan – typically requiring collateral or significant assets – and angel or venture capital, which involves selling an equity portion of the business in exchange for investment.

In an RBF investment, investors do not take an upfront ownership stake in the business, usually taking a small equity warrant instead.

RBF investments usually do not require a seat on the company’s board of directors, and no valuation exercise is necessary to make the investment.

Also, RBF does not require the backing of the loan by the founder’s personal assets.

“Basically, because we’re a licensee, and just the nature of our agreement with the US, we’re cashflow positive,” Foster told StartupSmart.

“But being able to raise growth capital has been complicated because it doesn’t really fit into the model most people are using at the moment.

“It becomes tough to borrow in a normal fashion. You’re too small for a lot of investors, certainly for smaller VCs. Angels are not necessarily interested.

“The banks are going to require a mortgage over your house and not everyone has a house to mortgage and, even if you did, it’s not generally a good idea.”

Foster has contributed his own money to the company’s revenue-based loan.

“The other investor is a guy called Andrew Bird. He’s the managing director of Sharesight and used to run Morningstar Australia. The third investor is a guy called Tony Mitchell,” Foster says.

“We’re structuring this deal at about a 21% return based on forecasts and we think it’s a pretty attractive alternative on both ends. No conversations about valuations are required.

“The other thing we’re in discussions about at the moment is we’d really love to see other businesses take up this model.

“A lot of start-ups say, ‘Here’s how we’re going to become a $100 million or $200 million company. We don’t think that’s realistic for a lot of businesses.

“These are perfectly viable businesses that will one day turn over $10 million or $20 million… They don’t need to raise $1 million or $2 million to prove their point.

“There’s no way you can raise a smaller amount of money without relying on friends and family or giving away enormous amounts of equity.”

The full version of this article first appeared on StartupSmart.


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