Localstake’s internal underwriting process is used to determine the preliminary investment structure and terms to be reviewed by potential investors. Localstake combines data from the following sources:
- Available historical bank transactions for the Company (typically up to a maximum of 2 years of activity)
- Third-party historical and projected industry data applicable to the Company
- Proprietary data on historical performance of businesses within the same industry
- Non-traditional Company-specific information (i.e. social media presence)
- Company-provided revenue and expense projections
- Company Credit check
Data available through each of these sources are prioritized based upon data quality and provided a confidence weighting to create a blended projection for revenues, gross margins, operating expenses, and EBITDA margins.
Next, a review of historical bank data, supplemented by a business credit check and a review of Company-provided data is used to determine any historical or proposed debt that may be a part of the Company’s capital structure. Expected payments on other outstanding debt are then added to the analysis. Localstake then reviews the proposed uses of capital provided by the Company to determine what additional capital expenditures to include in the cash flows analysis.
Specific to revenue share loans
For revenue share loans, Localstake uses a proprietary set of underwriting standards to determine the minimum interest rate on an equivalent non-contingent bond that would be needed to properly compensate investors for the risks associated with the offering. Localstake starts with a base interest rate and then adds in certain risk premiums to the interest rate based upon certain risk criteria, for example, years of historical operations.
Once the cash flow projections have been built, Localstake uses internal underwriting procedures to assess the maximum percentage of revenues the business can reasonably share with investors and the maximum amount of total debt obligation the business could potentially be able to service should it meet the projections outlined, while meeting certain debt coverage and minimum cash balance metrics.