URL: http://www.entrepreneur.com/money/financing/othersources/article21636.html

Definition Or Explanation: Royalty financing is an advance against future product or service sales. The advance is paid back by diverting a percentage of the product or service sales to the investor who issued the advance.

Appropriate For: Established companies that have a product or service, or emerging companies about to launch a product with high gross and net margins. Also companies with elastic pricing (i.e., the ability to raise prices without impacting sales. In addition, royalty financing is most appropriate for companies that experience a quick cause and effect between marketing activity and sales increases.

Supply: Substantial. Royalty financing may appeal to investors who typically do not make investments in private companies. In addition, angel investors, venture capitalists and even state, city or regional economic-development agencies can be sold on the concept of royalty financing.

Best Use: Financing-intensive sales and marketing activities.

Cost: Inexpensive for companies with high-margin products or services. Ease Of Acquisition: Relatively easy because the technique appeals to a wide variety of investors. In addition, because royalty financing is essentially a loan, it generally does not provoke state and federal securities laws.

Range Of Funds Typically Available: $50,000 to $1 million.

From Where's the Money? Sure-Fire Financing Solutions for Your Small Business, by Art Beroff and Dwayne Moyers. (c) Entrepreneur Press, 1999.