How do lenders view revenue based financing?

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January 25, 2022

by an investor from Indiana University at Bloomington in Austin, TX, USA

Had a great question from an investor last week, and honestly not one that I'd ever considered.

Question is how to SBA 7A lenders view revenue based financing in acquisitions, when revenue based financing is used to complete the equity injection into the business?

For instance, let's say you're acquiring a business for $5M that has $1M in EBITDA. To complete the deal, the SBA requires a 10% equity injection. One of your investors has agreed to lend you $1M ($500k toward a down payment, and $500k toward working capital), but wants to structure it as revenue based financing which you repay from a % of future revenues.

Would the lender see this as an equity injection given its subordinate to the 7A debt? Would it count against the debt service coverage ratio (since it is payable upon growth and would be paused if revenue declines or dips), etc?

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Reply by a lender
from University of Missouri in St. Louis, MO, USA
the main word you used is "lend." When it comes to equity you cannot borrower the down payment on an SBA loan. I think most lenders would (should) also reject the revenue based repayment either way. If you are paying someone else back with what amounts to excess funds, that money should be applied to the SBA loan first per the SOP.
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Reply by a searcher
in Chicago, IL, USA
You may want to explore having the investment structured as a security, giving you the option of paying a dividend. I am unfamiliar with SBA regulations and covenants so you may need to ask the question of whether it's possible, but certainly for non SBA deals the option is available.
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