Revenue-based loans for early-stage companies burst into the mainstream in 2022. Whether you are a subscription commerce business or a SaaS company, this could be a powerful new way to fund your expansion. In this guide I’ll explain what I’ve learnt as a founder from many weeks of conversations about the different flavours of debt funding, and when they’re appropriate for your business. What is a revenue-based loan (RBL)? An RBL is a business loan secured against a company’s future recurring revenue stream rather than the company’s assets. Most growth-phase companies can’t borrow from traditional banks because they are not profitable, are asset-light, and don’t have big enough revenue streams. Alternative debt providers, including RBLs, have stepped in to fill that need. This is different to invoice factoring. Factoring companies take over the billing relationship with your customers to repay the debt, which doesn’t work for companies like Littledata where most of the revenue is from Stripe card processing or payouts from an app store. How do RBLs compare with traditional loans? RBLs are typically covenant-lite and without personal guarantees. This means if your revenue drops and you are unable to repay the loans the lender has no right to take control of the business or pursue you personally for the debt. That said, all debt needs to be repaid in full — even if your revenue drops unexpectedly. How do RBLs compare with selling equity (VC funding)? Firstly, they are much less dilutive - sometimes non dilutive. This means the current shareholders keep their same hard-earned share of the business. Some lenders may ask for warrants (share options) to share in the upside if your growth takes off, but these are still a lot less dilutive than VC funds. Secondly, RBL providers won’t interfere or distract you. They don’t want a say in how you run your business; they only want visibility on how your revenue is progressing. On the flip side, debt providers won’t be able to advise you on growth strategy — most are very transactional. Yet, in my experience, VC investors exaggerate the benefit of their advice, which can be just as distracting as helpful.  Since the outcome for most VC-based companies is very binary, VC funds inevitably focus their attention on the biggest winners in their portfolio — meaning you won't get their attention in times of need anyway. In many cases RBLs are not a complete alternative to equity funding — they just reduce your dilution by match funding other equity investments. Are RBLs the same as venture debt? The terms are often used interchangeably, but traditionally venture debt was taken on alongside a big injection of cash for equity (e.g. alongside a Series A investment). This boosts the size of an already large funding round but doesn’t help companies trying to grow up to this level. RBLs can be used independent of any equity funding round. Littledata’s Story Littledata started exploring revenue based loans back in 2020, and took out our first 3 month loan from Forward Advances. However, with our marketing mix and 30 day free trial it’s impossible to get a return on investment within 3 months. So in 2021 we took on a 12 month loan from ClearCo, and then in 2022 another 12 month facility from Capchase. Then later in 2022 we started working with Element Finance, who have been extremely helpful in working around our existing lending and can lend over 4 years to postpone a larger equity raise. Will taking on a loan reduce my funding options in the future? As this kind of debt funding becomes more mainstream it is becoming a useful bridge to ever-larger Series A rounds. In my experience, having a loan on your books will not block an equity investment - as long as it is not convertible into equity, and the warrants for the lenders are minimal. In fact, since debt funders are agnostic about the exit route or valuation, they keep open exit options that a VC might block. So for example, If your growth stalls and you want to switch to run your company for profit, once you’ve repaid the debt, the income is all yours. If you can use debt funding to achieve a certain scale ($5M+ ARR), you’ll be able to access much cheaper term loans from lenders like Silicon Valley Bank. Is my business suitable for an RBL? If you haven’t yet generated $100k annual recurring revenue (ARR), or you are investing in a new and unproven market, then equity funding is a better option. To get confident in the stability of your future revenue streams the debt provider will want to see: 1. Majority recurring revenue 2. High net year-on-year revenue growth (at least 50%+) 3. Low customer value churn (less than 50% per year) 4. Low customer concentration (any one customer churning has low impact) My company Littledata qualifies on all fronts with 100% recurring revenue, high year-over-year growth, less than 40% gross value churn, and our largest customer is less than 2% of our revenue. How much can I borrow? Loan values are usually expressed as a multiple of run rate ARR, and the maximum will be between 20% (2 months revenue) and 50% (6 months revenue) of your ARR. This maximum depends on revenue stability, term length, and other factors. I think I can raise a VC. Are RBLs still relevant? I think so, yes. It helps boost your valuation and gives you time to wait for the right investor. Investors value subscription-based companies as a multiple of their ARR, depending on growth and churn. If you’re growing at a predictable rate month-over-month, why would you sell out a bigger share now when you could hold off for a higher valuation in the future. Short-term RBLs won’t increase your runway unless you can increase your revenue faster than the loan duration - otherwise the extra revenue you gain from bringing forward hiring or marketing spending will likely be offset by the debt repayments. But VC funding can also reduce your runway (by encouraging higher burn rates) AND limit your exit options. It’s a necessary evil in some cases, but don’t believe it’s the only way. (Image credit: Founder Collective) What are the options for funding a sub-$2M ARR business? At this level, you are limited to borrowing over a maximum 12-month term. This means you’ll need to repay the loan monthly over a year, so if you borrow $200k you’ll repay around $18k per month including a fee. This fee is typically expressed as a discount rate — equivalent to the discount you might offer a customer for paying annually rather than monthly. Discount rates on 12-month loans currently range from 5% to 11% depending on the underwriting risk. This translates to an APR of 10% to 18% since half of the money is repaid within half the loan term. Some lenders will structure the repayments as a percent of your monthly revenue (i.e. you repay over a minimum of 12 months), which limits the cash out if your revenue sinks. But, in practice for a growing company, the repayments will be fixed. You could also borrow for 6 months for half the cost. This doesn’t work for us, but it could work for you if you can quickly translate marketing dollars into more recurring revenue. Since the process is usually fully automated — with data feeds from common accounting and banking platforms — these lenders are very quick, with offers in 24 hours and loans within 10 days. Some of the lenders in this space are: Clearco (previously Clearbanc) Uncapped Forward Advances (stopped lending) Capchase Velocity Capital Vitt Founderpath Pipe Full disclosure: we’ve taken loans from Forward Advances, Clearco, Capchase, and Element Finance. What are the options for funding a $2M+ ARR business? The lenders above will welcome you with open arms; at this scale, their risk is lower and the fees are higher. But there are now more options for lower interest rates and longer-term loans. Element Finance offers 4-year loans of $500k+, with no warrants. Element Finance recently provided funding to Littledata for the next stage of growth.  Saas Capital, based in Seattle, also offers 4 to 5 year loans with lower interest and warrants. They can lend between 4x and 12x trailing MRR, depending on growth and churn, but focus more on SaaS. Riverside Acceleration Capital offers a 3 to 5-year loan, with an interest-only period at the start to reduce cash out. Prefcap offers a 2-year, rolled-up loan (no monthly payments, but repaid or refinanced in full at the end of 2 years). This reduces your cash out, but they want warrants with the right to invest equity in the next round. Flow Capital, based in Canada, offers a 3 to 5-year loan with lower interest but with warrants. Lending over longer periods is much less predictable, so the process will be more like interacting with a VC: a week or two to get to a term sheet, and then 6 to 8 weeks to complete due diligence and access the funds. In Conclusion If you’re a growing subscription business, check out the possibilities for RBL financing. Even if you don’t need the money now, it can be a useful option for bridging to the next equity round — or allowing you to say no to egregious term sheets. I’ve spent many weeks pitching VCs and as flattering as it is to have experienced investors quiz you about strategy, I’d far rather be putting the capital to work in growing the product and customer base. RBL funding gives me that option.

Ecommerce is growing faster than ever before, and Littledata is here to support Shopify merchants around the world. We're happy to be included in e.ventures' Top Seed Companies to Watch for May 2020. Littledata is featured alongside startups including Checkly (total raised: $2.25M) and Wise ($5.7M). A truly global VC fund, e.ventures has offices in San Francisco, Berlin, Beijing, Tokyo and Sao Paolo. Founded in 1998, they are known for their founders-first investment philosophy, with a major portfolio that includes such luminaries as Groupon, Sonos, The RealReal, and Littledata tech partner Segment. In the Top Seed Companies feature, Brendan Wales notes that there are no viable competitors for what Littledata is doing with fixing ecommerce tracking from the ground up. Wales sees a particularly strong market opportunity for ecommerce analytics in the current climate: Full funnel visibility has always been difficult within Shopify. Littledata solves that problem and also layers on consulting services for when people hit a roadblock. Large growing market opportunity. Despite these uncertain times, Littledata continues to scale. We are supporting merchants throughout the COVID-19 pandemic, and many of our clients are actually doing better than ever (here's a look at the data). We recently scaled up our solutions for subscription ecommerce and headless Shopify setups, and revamped our agency partner program and Enterprise Plus plans for Shopify Plus stores. Last week we also announced a major acquisition of two Shopify apps for Facebook marketing. Best-in-class customer support remains at the core of our mission. Littledata's Shopify apps for Segment and Google Analytics continue to receive 5-star reviews, most recently from Jimmy Joy, Biomel and Snow Teeth Whitening, with merchants noting the 'must-have' tech for 'insights' and 'accurate data' in Google Analytics, as well as the 'top notch' support and account management. If you are interested to learn more about Littledata's growth strategy, please get in touch.

What an amazing year it's been already! With a focus on smart connections for ecommerce analytics, Littledata is scaling quickly. We recently closed a new funding round and are firing on all cylinders, ramping up our agile product development, marketing outreach, career opportunities and conference participation. Here's the latest news from Littledata HQ. Littledata closes new angel funding round We're excited to announce that Littledata has closed a new angel funding round. We will be using the new funding chiefly to enhance product development and inbound marketing. Funding is a tricky thing. Too many companies make big claims without building a viable product, or estimate markets that don't actually turn out to exist. We've taken the opposite approach, building automated tools that solve real problems faced by major ecommerce brands. After all, the fanciest reporting in the world is useless if you can't trust your data! In other words we've been conservative with our funding because we believe in establishing deep product-market fit, and this new round comes at a perfect time. I've long said that bootstrapping builds better startups. For a bit of Littledata history, check out CEO Edward Upton's appearance on the Ecommerce Fastlane podcast, and his take on six challenges in developing a Shopify integration. New connection: Shopify to Segment We worked closely with the Segment team to create the ultimate Segment connection for Shopify and Shopify Plus. Segment offers a powerful Customer Data Infrastructure (CDI) that lets you clean, collect and control customer data. Our Shopify app for Segment users fixes tracking automatically, and lets you use Shopify as a Segment source. Benefits include: Server-side tracking for 100% accuracy Capture every customer touch point, including checkout steps, sales data and customer lifetime value (LTV) Push Shopify customer data to hundreds of Segment destinations Set up in minutes for any Shopify store We're hiring! With great things on the horizon, Littledata is seeking the best talent across departments in London, NYC and Romania. Check out our job postings for an up-to-date list. Our values include: Agile development New technologies Open collaboration Happy people We're looking for brilliant team players who are ready to build the next generation of analytics apps. Google Analytics knowledge is essential. Ecommerce experience is a plus! Conference season We all might live online these days, but our team culture values meetups IRL. If you're heading to Shopify Unite in Toronto this June, or ReCharge's ChargeX conference in LA in September, send us a note - we'd love to see you :) Should you go to that ecommerce conference? How to decide. There's never been a better time to join the Littledata family, whether as a partner, customer or team member. Growth has never been stronger - and customer happiness continues to be our most impressive statistic. Thank you for joining us on the journey to better data!