There are many loan companies and funds involved in the multi-billion-dollar business of making loans to small businesses. The loans are repayment “revenue-based”, relatively short-term and highly profitable for the lenders. The loans are like those made by finance companies and factors and may in some cases be predatory.
The loan terms vary, but after an agreement is reached the loans are processed rapidly. Although loan repayments are made as an agreed percentage of revenues, up to an agreed multiple of the amount loaned, they are not revenue royalties, as we use the term,
The benefit from this form of financing is that business owners can obtain funding to start or continue their businesses. The negative is that a high rate of interest is effectively being paid for the money. The lenders seek, and claim to have been receiving, very high Internal Rates of Return (IRR). The lender’s high profit margin is believed justified by the risk accepted in making the loan.
The differences between the revenue royalties we recommend to business owners and investors for the financing of businesses, and that which RBF companies offer, are the scale of amounts to be invested and the period and terms of the investment.
We believe that investors in the royalties we structure should expect to receive minimum, risk adjusted, returns which will be superior to those provided by other alternative investments.
The royalty rates of the royalties should also reflect the terms regarding investor payment protections and the success of the royalty issuing companies in achieving and possibly exceeding revenue projections.
We structure royalties to be accommodative of the business owner’s objectives, and our terms are not adversarial, as many of the RBF terms may be.
The following essay was prepared for those having a need as RBF borrowers, but also has application for others seeking financing as well.
Possible Protection for Small Business Owners from Transactions
Which Might Be Deemed to Be Predatory
State and federal legal protection against predatory lenders have focused on the needs of individual borrowers. However, the owners of small businesses and the businesses themselves are also possibly victims of predatory loans.
Entrepreneurs are frequently unable to access conventional sources of funding and are driven to accept loan terms from unregulated lenders which are unfairly favorable to the lender.
Should there be laws and a mechanism for small businesses to be able to independently assess the fairness of loan terms? Is there a role for an independent party, provided by the lender, to state that the terms of a transaction are consistent with those currently found in the market and that they represent a fair transaction?
The fair transaction statement is not intended to provide an opinion as to a valuation of the terms, but rather just whether the terms are similar to transactions currently occurring in the market.
There could also be a statement by the lender’s independent counsel that the lender and the transaction are in conformality with all applicable regulations.
It seems to me that these judgements and statements by independent entities are in the best interests of both the lender and borrower.
There could also be a 30- or 60-day period in which the borrower could repay 110% of the amount borrowed.
Arthur Lipper, Chairman arthurlipper@gmail.com
British Far East Holdings Ltd.