When VCs Say No


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Venture capital investing decreased by approximately 30% from 2011 to 2012.

This left many companies unable to secure funding. So, where do companies go when VCs say no?

We all know about crowd funding, but there are several sources of capital that are rarely discussed: revenue-based loans and asset-based loans. Both types of loans are similar to venture capital in that they work best with companies that have demonstrated potential for strong future growth.

Revenue-based Loans

Revenue-based loans have been around for decades, under the name royalty-based loans. Recently, this type of capital was reintroduced through Lighter Capital, a fund run by serial entrepreneur Andy Sack.

Revenue-based loans work well for companies that have solid revenue and healthy margins, as the loan is repaid as a percentage of future revenue.  Unlike a bank loan, the revenue-based loan sets the monthly payment as a percentage of monthly revenue. This is ideal for companies who may not have smooth revenue streams.  If they make zero revenue in any given month, their monthly payment is zero.

Arctaris Income Fund offers a hybrid version of the revenue-based loan in addition to the standard revenue-based loan.  Companies are able to pay monthly payments of principal and interest, plus a small royalty on revenue.

Asset-based Loans

Asset-based loans have also been around for decades and have a wide variety of offerings. The one thing all asset-based loans have in common is the underlying need for collateral (read: assets).

The most commonly used asset-based loan is factoring, which is the exchange of invoices to allow for better cash flow. For example, if you manufacture clothing but need capital to produce the line, you may be a candidate for factoring.

Rosenthal and Rosenthal is a commonly used firm in the fashion industry. They purchase invoices from customers who need capital to manufacture merchandise that has already been ordered and invoiced.  Once the companies deliver the merchandise and receive payment from their client, they repay their loan.

Of course, there are fees involved.  A revenue-based loan ranges from 20% to 40% per annum and an asset-based loan ranges from 2% to 10% of the invoice amount.  These fees may seem high, but keep in mind that you have not diluted your company’s equity as you would have by giving equity to a venture capital fund.  Most companies use revenue-based and asset-based loans as a short term financing strategy. It allows them to grow their companies without diluting or giving away control of the company.

This post originally appeared on Atelier Advisors. Lili Balfour is the founder and CEO of the SoMa-based financial advisory firm, Atelier Advisors, creator of Lean Finance for Startups and Finance Boot Camp for Entrepreneurs.  All AlleyWatch readers are automatically eligible for a 50% discount on either of the courses using the preceding links.

Image credit: CC by sboneham

About the author: Lili Balfour

Lili Balfour is the founder and CEO of the SoMa-based financial advisory firm, Atelier Advisors, creator and host of Finance for Entrepreneurs, author of Master the Finance Game, and host of the Finance for Entrepreneurs broadcast on Spreecast.

After spending fifteen years in investment management and investment banking, she decided to develop a firm to cater to the specific needs of early-stage companies. At Atelier Advisors, Lili advises leading brands across industries: from tech to consumer goods. In the past, she has advised over 100 brands, including:

Bag, Borrow, or Steal, Visual IQ, Alpha Theory, Derivix, Practice Fusion, Peeled Snacks, Sustainable Minds, Firescope, Chix 6, Duchess Marden, Erin Fetherston, Eckart Tolle, and Stuart Skorman (founder of Reel.com, Elephant Pharmacy, Hungry Minds, and Clerk Dogs (sold to Netflix)).

While advising companies at Atelier Advisors, she observed a common theme – -brilliant founders avoided finance. She began writing about entrepreneurial finance to solve this problem.

As a native of Silicon Valley and a first generation Mexican American, Lili understands the importance of imparting wisdom learned in Silicon Valley to the rest of the world. Her goal is to teach the entire planet about entrepreneurial finance.

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