I prefer to call ’em like I see ’em – and right now, I don’t see any reason why the internet has been using the term royalty based financing for traditional businesses. The word royalty is defined by Investopedia as “a legally-binding payment made to an individual, for the ongoing use of his or her originally-created assets, including copyrighted works, franchises, and natural resources.” I mean, royalties are what you typically make from the rights to a song, a book, or other copyrighted work.
Yet for some reason groups like UpCounsel define Royalty Financing is an investment where “investors get their money back through royalties that are a percentage of the company’s revenue.” — In what world is (hang with me on this metaphor) is an investment into a business equated with copyrighted works? Because that’s how the analogy plays out unfortunately:
- Royalty = Payment made to individual for the right to use their assets / copyrighted works.
- Royalty = (?) Payment made to investor for the right to… use their money?
My point is, in most cases royalty financing is a misnomer. At least Entrepreneur Magazine calls out that it’s most common in mining and music, which actually makes sense. However, there are many companies, blogs, finance firms, and others who are – in my opinion – using the term quite incorrectly. A few of them are even law firms, such as Bingham, Greenebaum Doll, are indeed law firms. You’d think they’d be referencing this correctly, wouldn’t ya?
I will cede one point: There’s a trend I’ve noticed as a result of researching for this article and it seems that perhaps royalty financing is a term from a bygone era. For example this article from the Wall Street Journal is from 2010 and other articles I found even had invalid dates.
Who really knows. But unless you’re in music, mining, film, or other industries where copyrights are the predominant method of protecting your intellectual property – I’d say revenue-based financing is the vehicle you truly ought to stick with. It’s structured to fit businesses, and you’ll know what you’re signing up for right from the beginning.