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.
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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.