What is revenue sharing?
Revenue sharing is an increasingly popular loan arrangement where borrowers tie their repayments to the amount of revenue that their business generates over time. When a borrower generates high revenue, their repayment increases – and if revenue dips, so does their repayment amount. This can offer flexibility to high growth or seasonal businesses where revenue projections can be harder to predict. It also has the potential to offer attractive rates of return to investors.
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How does revenue sharing work?
A Revenue Share Note is a formal promissory note where a business borrower is legally committing to pay a certain percentage of their revenue on a periodic basis to their lenders or investors until a pre-agreed multiple is repaid.
Key terms to know about revenue sharing
Several of the key terms that both borrowers and lenders should consider are:
Investment Multiple: The multiple is the pre-agreed return that an investor can expect to receive if the note is paid in full. Multiples can vary widely depending on many factors such as the growth trajectory of the business, the industry, and the risk associated with the business. Generally multiples for Revenue Share Notes on Honeycomb range from 1.5x-3.0x. For example, if a multiple for a Revenue Share Note is 1.8x and an investor makes a $1,000 investment, they can expect repayments totalling $1,800 over the life of the Note, if it is paid as agreed.
Term Length: Most Revenue Share Notes, including those listed on Honeycomb, provide a term length or a set period of time in which the borrower agrees that the full multiple will be paid back. If the term expires and the full multiple has not been returned to investors, then a lump sum payment (often known as a balloon payment) will be required from the borrower.
Repayment Terms: Revenue Share Notes on Honeycomb have monthly payments, those monthly payments are held in a secure third party account and distributed to investors on a quarterly basis. Other Revenue Share Notes may involve semi-annual or even annual payments.
Revenue Percentage: Depending on the gross revenues of a business, their financial projections, and the amount of money being raised, a predetermined revenue percentage is assigned. On Honeycomb, the monthly payment can easily be calculated by multiplying a business’s revenue in the past month against their revenue percentage.
Minimum Payment: Some Revenue Share Notes include a minimum payment to protect investors and to reduce the size of a potential balloon payment. A minimum payment could take many different forms such as a percentage of the total amount due, a percentage of revenue forecasts, or a simple flat rate.
Securitization: To offer greater protections for investors, some Revenue Share Notes may be secured by assets of the business or a personal guaranty from a business owner.
What are the advantages for a Revenue Share Note?
For borrowers, a Revenue Share Note can help their monthly debt service scale with their business. As they sell more products and generate more revenue, they can use their increased cashflow to service more debt; meanwhile, when revenue dips so too does their monthly loan payment, thus preserving cash in the business.
For investors, a Revenue Share Note can offer an attractive rate of return and whatsmore, offers some upside. If a borrower exceeds growth expectations, their monthly repayments will increase and the term length will naturally be shortened, increasing the Annual Percentage Yield (APY) for investors.
* Remember, investing is risky and nothing in this article is intended to be used as investment advice.