By Evan Vitale
As a good alternative to venture capital funding – and a funding that is hardly ever discussed – is “royalty funding.”
What exactly is royalty funding?
Royalty funding is described as a relatively new funding concept that offers an alternative to regular debt financing (i.e. loans and trade credit) and equity financing (i.e. venture capital and stock sales). Instead, in royalty funding, a business receives a specific amount of money from an investor or a group of investors.
Rather than have an equity stake in your business, the investors lend funds for a guaranteed percentage of your revenues for whatever the business is selling. Business owners guarantee investor(s) a percentage of their revenue over a period of time and pay them back the advance of cash (and some more). Deals usually run at 2% to 6% of increased revenues.
Typically, royalty financing is more common in well-established industries, such as music or mining, where revenue is steady but unpredictable.
Royalty funding is great for businesses who need a quick infusion of cash, but don’t want to give up control to equity investors. In addition, if the business suffers a down month in sales, payments are tied to a percentage of revenues, so there’s less need to worry about making a set loan payment, etc.
However, royalty funding can be expensive and businesses could eventually pay substantially more if sales take off. Remember? The funding is based on a royalty of your sales.
Some private equity firms and angel investors are willing to make royalty investments.
As always, seek advice from your team of experience professionals: your accountant, your lawyer and your banker. They may also be able to refer you to a firm that is interested in providing royalty funding.