Laura Howard-Gayeton founded Laloo’s Goat Milk Ice Cream Company in 2004 with money from her savings. She grew her Petaluma, Calif.-based business slowly, trying to prove her concept and attract customers, even personally milking goats for a time. When her ice cream was picked up in a few stores, she went to friends and family for more money. And when that well dried up, she approached banks—all which turned her away.
By 2009, she was in a rough spot and knew she’d either have to give up equity or find another mode of fundraising. Fortunately, the following year, a friend introduced her to Lighter Capital, a Seattle-based company specializing in revenue-based financing, and soon her funding woes subsided.
She learned that in partnering with Lighter she wouldn’t have to give away equity; the company would instead loan her a lump sum and then take a commission based on how her business performed. A representative from the company flew down to Petaluma and pretty soon a deal was done. Howard-Gayeton won’t reveal how much she borrowed, but says the arrangement is working beautifully.
“I don’t have to meet a certain number every month, I only have to pay a percentage of our revenues, which is really great because we are a seasonal company,” she says. “The loans (she’s taken two to date) have made a huge difference in my business. I’ve been able to make more product and expand.”
What Is Revenue-Based Financing?
Revenue-based financing isn’t new, says BJ Lackland, CEO of Lighter Capital, adding that the concept is often dubbed "royalty-based financing" and is frequently used by the film and natural resources industries—paying investors back with a percentage of gross receipts. This method, though, is new to the small-business sector, he says.
“We think this is an underserved part of the market that largely doesn’t have access to capital,” he says. “We are trying to fill the gap for companies that don’t qualify for either venture capital or bank funding.”
Lighter’s loans range from $50,000 to $500,000 per small business. The company doesn’t give fixed interests rates, Lackland says; it depends on the riskiness of the business. The company favors backing businesses specializing in software and specialty manufacturing that have between $200,000 and $3 million in revenues and are growing at a rate of 20 percent per year, with margins in excess of 50 percent.
The Risk
This is expensive money. A small-business owner securing a $100,000 loan could be on the hook for $150,000 to $200,000. Lackland says most loans are paid in about four years, and the company is looking for a 20 percent return on investment. And while Lighter Capital doesn’t ask for a personal guarantee (they won’t take your house), they do put a lien on business assets.
“They are quite collateralized with me; they have the first rights to a lot of things in my business should I go down,” says Howard-Gayeton.
One upside: The faster your business grows, the faster you pay off the loan. Another advantage is that the process is much less headache-inducing than approaching traditional banking institutions, says Howard-Gayeton.
“If you go to a bank, you fill out so much ridiculous, bureaucratic paperwork and an analyst that doesn’t know your business will determine if you are right for a loan,” she says. “With this method, I feel like I have a partner, a human being to talk with, an investor that really does his homework.”
Are you having a hard time getting financing? Would you ever consider participating in a revenue-based model?
Photo credits: Thinkstock and courtesy of Laloo’s Goat Milk Ice Cream Company