Small businesses are the backbone of a strong economy. Yet, as a small business owner, one of the many challenges is finding financing to support working capital needs. Too often traditional bank financing may not be available for newer or rapidly growing businesses, and equity capital would require the business owner to sell ownership in their business. So where is a growing small business owner to turn when the bank says no and selling part of the company is more than the owner wants to take on?
Business Oregon’s Small Business Expansion Program, which is a revenue-based financing program, may be a solution. Revenue-based financing is a potential solution for situations in between “almost bankable” and angel or venture capital equity deals, similar to mezzanine financing for working capital. This program allows businesses to pay a periodic revenue payment as a percentage of net sales to accommodate growing companies that may not qualify for traditional financing.
How it Works
The percentage of sales varies per applicant. Business Oregon seeks to realize a target return on investment over a three- to five-year period. Additional payments may be required in event of early payoff or sale of the company. Once the pre-determined return target has been achieved, all payments stop and the company has satisfied its repayment obligations. The typical financing amount for the program is from $50,000 up to $250,000.
Key Requirements
The company must be a traded-sector business and have significant job creation impacts. Each revenue finance request will be evaluated on a case-by-case basis, but companies are required to have an existing history of sales and have potential for rapid growth in sales. Other considerations include a history of significant gross profit margins or reasonable expectations of ability to achieve significant gross profit margins Companies are required to have collateral to secure the loan, personal guarantees of major owners may be considered.
Benefits
Revenue financing provides many benefits to Oregon businesses compared to traditional debt and equity financing, including:
Attractive alternative for small businesses who are unable to borrow from traditional lenders and who do not want to give up ownership in their companies
It provides greater flexibility than traditional debt at potentially a lower cost of capital than equity
Makes financing available that may not be available from traditional sources of debt or Business Oregon’s other business finance programs.
Repayment is flexible in that it is a percentage of revenue, not a set monthly payment.
Example
An information industry company with existing products and revenues plans to add new products and create 12 new jobs. The company’s annual sales are projected at $2,000,000 in year one after the project funding. The total project funding is $1,250,000, primarily for working capital. Business Oregon provided a $250,000 revenue based financing loan with the remaining financing coming from equity investors. The Business Oregon loan was a 5 year loan with revenue payments of 1.10% of net sales.
In summary, the Small Business Expansion Program is not for everyone, but for a traded sector business who is growing rapidly and is struggling finding financing, it might just be the right fit.
oregon4biz.com
