Greetings,
I am looking for guidance on how to properly account for Revenue Based Financing.
Example:
The company is given a loan and repays the lender a percent of revenue until the principal plus a "minimum" amount of interest is repaid, yielding the lender a specified IRR.
For instance, the terms of the loan are:
Principal: 250,000
IRR: 27%
Interest Required: 206.000
Total Payments Required: 456,000
OID Rate: 12.75%
The service level agreement states:
Interest on the Outstanding Advance Balance shall accrue at such rate as is necessary to generate the greater of (x) the IRR Target or (y) an amount equal to the Minimum Interest (the “Interest”). Company understands that the effective interest rate will increase as the speed of repayment decreases, and decrease as the speed of repayment increases. For purposes of calculating the original issue discount and related income and deduction on the Advances the Lender and Borrower shall use the Comparable Yield
My question is this:
What is the appropriate way to account for the interest expense? The interest changes on a monthly basis depending on the "speed" with which the payment occurs (based on revenue and how much the actual payment is). I'm not certain how to determine which part of the payment is interest and which part is principal. If I use the OID rate as the terms state, the total interest that would be recognized over the term of the loan is well below the actual interest being paid.
My approach has been to create a schedule with the estimated monthly payments based on revenue and total financing, and the total of the minimum interest that is required based on the IRR. Since the company's revenue is smaller at the beginning of the loan term (the loan was taken for growth capital), the required payment is smaller and is less than the interest being accrued based on target IRR. This results in a deferred interest expense which I have been booking to a liability account. I'm not certain that this is the correct treatment.
Is there any technical guidance that relates to revenue based financing? I have looked, but have not been able to locate any.
Any assistance or guidance would be greatly appreciated.
I am looking for guidance on how to properly account for Revenue Based Financing.
Example:
The company is given a loan and repays the lender a percent of revenue until the principal plus a "minimum" amount of interest is repaid, yielding the lender a specified IRR.
For instance, the terms of the loan are:
Principal: 250,000
IRR: 27%
Interest Required: 206.000
Total Payments Required: 456,000
OID Rate: 12.75%
The service level agreement states:
Interest on the Outstanding Advance Balance shall accrue at such rate as is necessary to generate the greater of (x) the IRR Target or (y) an amount equal to the Minimum Interest (the “Interest”). Company understands that the effective interest rate will increase as the speed of repayment decreases, and decrease as the speed of repayment increases. For purposes of calculating the original issue discount and related income and deduction on the Advances the Lender and Borrower shall use the Comparable Yield
My question is this:
What is the appropriate way to account for the interest expense? The interest changes on a monthly basis depending on the "speed" with which the payment occurs (based on revenue and how much the actual payment is). I'm not certain how to determine which part of the payment is interest and which part is principal. If I use the OID rate as the terms state, the total interest that would be recognized over the term of the loan is well below the actual interest being paid.
My approach has been to create a schedule with the estimated monthly payments based on revenue and total financing, and the total of the minimum interest that is required based on the IRR. Since the company's revenue is smaller at the beginning of the loan term (the loan was taken for growth capital), the required payment is smaller and is less than the interest being accrued based on target IRR. This results in a deferred interest expense which I have been booking to a liability account. I'm not certain that this is the correct treatment.
Is there any technical guidance that relates to revenue based financing? I have looked, but have not been able to locate any.
Any assistance or guidance would be greatly appreciated.
