A brand with annual revenue of Rs. 12 Mn has approached us for Rs. 2 Mn in funding to invest in a new godown. The brand has Rs. 2 Mn in its bank account and currently makes losses of 100k a month.
They already have a term sheet from a competitor, which is offering them 1 Mn for six months at a 10% yield (i.e. Rs. 1.1 Mn to be paid back) by taking a 18.3% revenue share every month, till the full amount is paid back.
However, the brand wants more capital, at least a 12-month product, and also a lower IRR. It feels that it will grow its revenues and therefore pay back the funds sooner than six months, thus resulting in a very high IRR.
What terms (yield, revenue share, or other special terms) would you suggest we offer if we expect the company to grow 10% m-o-m? What IRR will it generate for us?
You will get a % of company's revenue? What is the company's current revenue? and you expect the revenue to grow 10% monthly?
Yes we are a revenue based financing company. So we get a certain %share of revenue of the company that we’ve decided on. And yes 10% mom growth in revenue
Annual revenue of 12mn so let’s say a monthly revenue of 100k growing 10% mom
Guys how does the yield affect the IRR in this question in any way. Also burn rate and cash and bank are meant to confuse me right
Is the competitor's loan already in service? Or it's just a proposal that the brand wants to replace with your company's funding?
No the competitors offer isn’t in service, the competitor has made that offer but the target company is holding out because they want a longer tenor. And our company is offering the tenor of 1 year
Competitor's annualized IRR is 74% (de-annualized IRR is 32% since the Company is expected to pay back in 5 months). If you charge 10.75% revenue share for 12 months, your IRR is 30% which is lower than Competitor's de-annulized 32%. If you charge 12.25% revenue share for 12 months, your IRR is 67% which is lower than Competitor's annualized IRR. This IRR view is just one way (too simple way) to look at it. If the assumption is that Brand wants to go with a loan from a lender who will experience a lower IRR than its competitor's, then sure. In reality that's not how businesses operate
I didn’t get it. How did you arrive at the IRR values?
The assumption is that the brand just wants more funds for a higher tenor. And to make it up to us they’re saying you’ll have a higher IRR on your investment, that’s what my understanding of it is.
Also, the cash and burn are of no importance right?
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