I’ve seen hundreds of term sheets, having worked full-time at a seed fund for years, and subsequently having supported numerous founders and executives think about and obtain financing.
Here are a few things to consider if you receive a term sheet for revenue based financing:
Read the fine print. There may be a warrant in your term sheet which could mean you’re giving your financier the right to purchase a percentage of your company. If things go really well, that equity could be extremely valuable – so don’t overlook it.
Fee / Payments Based on Gross Revenue
Many RBF providers set repayment terms based on gross revenue. All is well and good until you realize that you can’t service the debt. Before signing any agreements, make sure our profit margins are healthy enough to support the percentage-based fee. 3.5% seems pretty common – so hopefully your margins are well above that.
We’d suggest you use our revenue based financing calculator to make sure you have a clear understanding of what you’re signing up for.
Make sure you have the operational capacity to handle reporting. If you’re an early stage startup, it may not seem like much, but monthly reporting of financials and bank statements can come around pretty quickly (every month to be exact) and you don’t want to get caught in breach of your contract on a technicality.
Often, financiers require that the borrower (you) use the capital to finance “growth or expansion of the company’s revenue-generating activities.” This is pretty straight forward – but remember that you do need to spend this capital on growth or other approved expenditures.
If you realize you need capital outside of the approved categories, don’t be tempted to use your RBF for it. For example, you likely won’t want to use your RBF to hire a personal assistant – that won’t be a good look come monthly reporting time.
Term Sheet Examples
Have a term sheet that you’d like to anonymously share with others?