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An Introduction to Royalty Financing

What it is: Rather than fork over cash in return for an equity stake in your business, investors lend money for a guaranteed percentage of revenues for whatever the business is selling.

More than $100 billion-worth of royalty payments are made each year, according to The Royalty Exchange. The company is in the game itself with a website linking royalty investors and investees. 

How it works: Business owners guarantee investors a percentage of their revenue over a period of time -- paying them back the advance of cash and then some. Deals usually run at 2 to 6 percent of increased revenue.

Related: How to Get Money to Make Money 

Deals can run into the millions of dollars. Royalty financing is well-established in industries from mining and music, in which revenue is steady when it is coming in, but also unpredictable.

Upside: This is a potentially great financing mechanism for business owners who need a quick infusion of cash for their enterprise, and don’t want to give up control to equity investors. Plus, there are no worries during a down month for sales, because payments are tied to a percentage of revenue.

Downside: The financing can be expensive, and you could end of paying substantially more if product sales really take off.

On the flip side, you need to convince investors up front that your product or service has a lucrative future that will generate the necessary revenue to pay back the loan.

Related: 10 Ways to Get Investors to Listen to Your Business Pitch

How to get it: There are private equity firms and angel investors around the country willing to make royalty investments.

Seek out advice on prospective royalty investors from your local Chamber of Commerce, the area Small Business Development Center, or a trusted banker, lawyer or accountant.

It also might be worth it to check out a website such as The Royalty Exchange, in which investors peruse calls for royalty investing from companies producing everything from books to pharmaceuticals to solar energy technology. 

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