Royalty financing sets loan payments as a percentage of revenues. It can be a device for a young company to keep its debt servicing at affordable levels.
Royalty financing is historically associated with industries such as natural resource extraction, movie production and pharmaceuticals. More recently, royalty financing has been utilized more generally by young firms with high growth potential, especialy in technology.
Companies receiving royalty financing usually agree to pay the lender between 2% and 6% of incremental revenue above a baseline level. The repayment period for royalty financing can be either a set number of years or until a specified multiple of the initial loan value has been paid.
Royalty financing is more likely to be obtained through specialty lenders than through traditional banks. Royalty financing also has commonalities with merchant banking and venture capital.
Source: "Alternative Financing Option," The Wall Street Journal, 12/2/2010.
