The era of “move fast and break things” looks to be over. Once conducive to unicorns and venture capitalists with a kingmaker bent, this high-growth and high-risk mentality is losing appeal among business owners amid decreasing stock prices and the economic fallout from the Covid-19 pandemic.
An increasingly common alternative is revenue-based financing: loans that are repaid as a percentage of revenue with a cap on the amount repaid or the repayment timeline.
Adobe Capital in Mexico uses revenue-based debtto allocate capital into growth impact enterprises since 2012. These agreements are convertible to equity based on the amount of debt outstanding. The value to entrepreneurs is that they provide access to less-dilutive risk capital and which doesn’t require follow-on fundraising if the company establishes its cash flow or qualifies for a bank loan. Contrary to traditional debt, the agreements offer flexible payment schedules and initial grace periods well suited to early growth stage social enterprises.