Royalty Finance, otherwise known as a Royalty-Based Investment, is a type of financial product available to UK businesses seeking funding.
With this type of financial product, a lender (or investor) will typically purchase a percentage of a business’s future receivables (e.g. sales).
In this, the lender will provide working capital up front, so that the business can continue to operate without any disruptions and put their newly acquired funds to use.
How Does Royalty Financing Work?
Royalty Finance is a type of alternative financing product that enables businesses to raise capital by selling a portion of their future revenue, for a fixed period of time.
Typically, affordability is calculated upon the business’s overall health and average monthly revenue.
Given this, Royalty Finance is particularly useful for business owners with a poor personal credit score and those without fixed collateral to post against funding.
With this type of financial product, business owners are not expected to give up equity in their organisation, meaning their level of ownership is never diluted.
Rather, future sales revenue – up to an agreed amount – serves as a form of ‘collateral’ for the lender.
Alternative Lenders Offering Royalty Financing for Small Businesses
This type of financial product is offered by certain lenders who specialise in funding for small businesses, such as Got Capital, rather than banks and traditional financiers.
It’s no secret that small businesses habitually have inconsistent cash flow – due to factors like fluctuating sales revenue, late payments and unforeseen costs – and require working capital to plug short-term financial gaps in their budgets.
In yesteryear, business owners would have had a plethora of high street banks more than willing to support them with flexible working capital.
Nowadays though, it typically takes months for banks to assess business loan applications, with entrepreneurs required to submit detailed business plans alongside their intended use of the funds.
Moreover, banks are often unwilling and unable to offer loans to SMEs without significant personal guarantees and liabilities.
This is a level of risk that business owners should not be forced to accept.
As banks have reigned in their risk appetite and drastically reduced lending to SMEs, it has now been left for alternative lenders to best support small companies in the UK, offering innovative financial products that are much better suited to the needs of business owners.
Is Royalty Finance Right For My Business?
If you’re seeking funding and are looking for a lender that offers Royalty Finance, there are a number of factors to consider when evaluating whether certain products are right for your business needs.
Before applying for funding, you should ask yourself:
How much money do you need for your business?
When searching online you’ll see many alternative lenders offering Royalty Financing for large companies, with ‘investments’ starting at £100k.
If you are seeking Royalty Finance for your business, it is important to find an alternative lender that offers the level of funding typically needed by SMEs to plug cash flow shortfalls.
What are the repayment terms on the funded amount?
Ensure that you find a lender that understands the cash flow requirements for your business.
Many alternative lenders will offer long-term financing products that lock you into repayments over a number of years. Furthermore, most lenders will require large monthly repayments to service the funded amount.
If your cash flow requirements are relatively short-term, you should consider a lender that offers repayment terms under 12 months.
Additionally, SMEs often find little and often payment more manageable for their budgets. Therefore, a lender that is willing to accommodate daily or weekly repayments could be a great fit for your small business.
What are the fees and interest rates?
On top of the funded amount and agreed percentage of your future sales, many lenders will have additional fees and hidden costs within their contractual agreements.
If you’re looking for business finance, find a lender that is transparent about your expected repayments, ahead of signing a contract.
Do I need to provide a personal guarantee?
Nowadays many lenders seek a personal guarantee from the business owner against any funding received.
More often than not, funding is guaranteed against collateral, such as the business owner’s house.
However, not all Royalty Finance products require personal liabilities. If putting your house on the line is not a risk you’re willing to take – or like many, you do not have a house to post as collateral – you should look for a lender that offers ‘unsecured funding’.
Unsecured funding means that the liability of the financing sits against your business, rather than your personal property.
What is the minimum monthly revenue requirement?
Good lenders should specify the minimum revenue requirements to obtain business funding. After all, a business should only seek working capital if they’re able to afford the repayments.
How long does my company have to have been operating for?
Many alternative lenders will only offer Revenue Finance products to companies that have been in business for over 2 years.
If your company is less than 2 years old, look for a lender that funds younger businesses, to avoid disappointment.
Is there a prepayment penalty?
Depending on your lender, you might be penalised for paying off your balance early. Yes, you heard that right – early repayment can result in financial penalties!
To avoid issues down the road, you should find a lender that will not penalise you for paying off your balance early. Even better – find a lender that will offer you discount incentives for early repayment.
What is the process for renewing or extending the financing?
Often when SMEs first seek short-term financing, it’s because there is an urgent business need that requires immediate attention.
Once the company is back on its feet, business owners might seek funding for business growth initiatives.
When you’re looking for Royalty Financing, make sure you find a lender that will make it easy for you to renew or extend your funding amount.
Small businesses access unsecured, fast funding from Got Capital. As an alternative lender, Got Capital offers financing solutions specifically designed for and catered to the needs of SMEs.
