Revenue-based financing is also known as royalty-based financing. It is a form of financing sometimes used in connection with the sale of businesses as an alternate to the more commonly used debt financing.

In revenue-based financing, there are no fixed payments or interest. In a business sale, the buyer agrees to pay a percentage of the company's gross revenue until a predetermined amount has been paid. If revenue increases, payments increase. Likewise, if revenue decreases, payments decrease, but the amount owing overall remains fixed according to the purchase/sale agreement.

Revenue-based financing is usually more expensive than debt financing, but it is safer for the buyer of the business because payments are based on revenue received and are not fixed each month.

 

Mezzanine Debt

Mezzanine debt is a type of hybrid debt that is subordinate to other debt. It is frequently associated with acquisitions, mergers and buyouts. Mezzanine debt is often long term debt with flexible repayment terms. The loans often provide the lender with warrants or options.

 

Private Money - Private Money Lenders

Private money refers to loans made to individuals, companies, and other entities by non-institutional individuals or private lenders. These loans normally carry higher interest rates than institutional loans made by banks, credit unions, and insurance companies because these institutional lenders generally have more stringent underwriting requirements. Private money lenders generally rely more on the asset value of collateral and less on the credit rating and/or the cash flow or income of the borrower.

 

Subordinated Debt

Subordinated debt is high risk, unsecured junior debt that ranks below senior debt, but above equity in the event of a liquidation. The interest rate on subordinated debt is always higher than on secured debt because the lender's risk of default is always higher. Subordinated debt is most common in mergers and acquisitions, and in private equity transactions where senior lenders cannot or will not provide full funding. The debt may be evidenced by bonds or a standard loan agreement.

 

Seller Financing

Seller financing, also referred to as owner financing, can be secured or unsecured financing where the owner or seller becomes the lender. Seller financing has both advantages and disadvantages to the seller and buyer, but this type of financing almost always results in an earlier closing. Seller loans may be assumable subject to defined conditions or they may not be assumable. Loans provided by sellers may be short-term loans and may have high interest rates. Terms vary depending on market conditions and the motivation of the parties. Sellers are always cautioned to check the buyer's credit score before offering financing.

 

Evergreen Loans

An evergreen loan is a revolving line of credit requiring the borrower to pay only monthly interest. The principal is expected to be made at the end of the loan term which is usually two to three years from the effective date. These loans are regularly extended by the lender at maturity making them long term loans.