Why Revenue-Based Financing Can Be a Win for Start-Ups

Why Revenue-Based Financing Can Be a Win for Start-Ups

The founder of Ciel Loft & Home explains how his investor model favors the independent retailer.

Your napkin calculations are probably right. So are your hunches. But to mitigate risk, you share your ideas with other sane people. Once you’ve verified that your math is correct, and your concept isn’t just fairytale, how do you get some money to get this thing going? 

Ciel Loft & Home, my St. Louis Park-based home furnishings business, got lucky: We had a friend of a friend who was willing to roll the dice on us. I think the structure of our deal is a fantastic way to structure a finance arrangement, and it’s transferable to many business models. But it’s not always easy to find that friend of a friend.  

As we formulated the concept, we more or less just shared it as any human would, with the people in our lives. In response to, “What have you been up to lately?” I’d talk about financing for my retail venture. For a while, I was assuming we would have a group of a few “middle class” friends and family members who would pledge $2,000 to $10,000 each. When our big friend of a friend came around, it seemed like the cleaner route. He’s my version of an angel investor—he has enough money that $200,000 is not that much of a downside. I wouldn’t feel comfortable otherwise. Please do not stake your retirement on me! 

Our arrangement is what’s known as revenue-based financing, which was our investor’s suggestion. Basically, we pay back our investor a percentage of sales, or royalties. Royalties? We view it as an extra sales tax. Compared to a straight loan, our payments move up and down with sales instead of a set monthly amount. As compared to ownership agreements, we didn’t need to give away any equity.  

Our basic agreement was this: $200,000 investment; 6 percent royalty fee until the $200,000 is returned, 2 percent royalty fee thereafter for a total period of 10 years, with a guaranteed return of 3 percent.  


Ciel Loft & Home’s show floor. (Photo courtesy of Ciel Loft & Home)

The upside for the business owner is stable cash flow, as payments are correlated with sales. The upside for the investor is that no matter how great or poor sales are, they get a consistent payment. Our estimates put the investor’s ROI at about 15 percent annually. I haven’t studied every investment structure, but we love the opportunity this afforded us at Ciel. 

At 5 percent return and a 5-year term, $200,000 would have a $3,774 monthly payment. Some months, that can be too large of the percentage of income to cash flow well. The  revenue-based financing ensures things are balanced out month to month. 

Our retail business concept grew out of our experience collecting and wholesaling goods that we found and had made in Western China, like cabinets and tables. We added sofas, rugs, and art. We knew that we could source cool things at a good price, we just had to figure out retail. 

Our second year in business we were profitable—I mean like paying myself a salary and still profitable on top of that. Unfortunately, the building we were in was sold and the new landlord put it on the chopping block for redevelopment, so two and half years into our young business we were forced to transition. We somehow were profitable in two of the four transition years. This year looks promising as well.   


An inside view into Ciel Loft & Home. (Photos courtesy of Ciel Loft & Home)

Back to the investment quandary. I have been working on a Ciel spin-off, a line of tables called PIKKA. I thought about crowd funding this project—partly to raise capital, but partly as marketing. A great example of this is our beloved Travail restaurant. They raised more than $200,000 in small amounts on Kickstarter. That means a lot of people were really engaged and were willing to put money down on a forthcoming project. Yet, they still needed about $1 million more to carry out their expansion plan. The Kickstarter was small beans, but a stroke of marketing genius. Crowdfunding is definitely a route to consider if you have a shippable product that you need help developing, or if you (like Travail) already have a real following. 

We are still striving for a fairytale ending, probably involving a castle of sorts on some lake. That wouldn’t be possible without an investment with balanced benefits. Good luck finding financing for your intelligent fairytale!   

Andy Higgins
Co-Founder and Head of Retail
Ciel Loft & Home

Andy Higgins’ background in home building, artistry, and ministry makes for a unique combination in helping people realize a vision for their spaces. His time in China with his wife gave him an appreciation for all things global and his four kids keep him grounded and practical. He offers free advice and beer daily at Ciel Loft & Home for those looking to make tangible improvements to their homes. His spinning brain has spun two companies off of Ciel: Pikka Design Co., a custom table company, and Veritable Goods, a wholesale gift company.