Royalty based financing typically requires that your business has a very high amount of gross income. Their many benefits to working with private equity firms that specialize in providing capital on a royalty based basis. In your business plan, you should have a showcase your ability to operate their business on a day-to-day basis as the gross margins need to be extremely high for this type of outside bases financing. Royalty based financing can it help you get the capital that you need without having to give up too much of your equity as you will be required to pay a monthly fee based on your revenues. It usually takes three months to one year to raise financing in regards to this type of business deal. Most small business investment companies do not provide this type of investment to small or medium sized businesses.
A power point presentation should be provided to any interested party that is seeking to earn a return on investment that is based on your gross monthly revenues. As we will continue to discuss in future articles, you will be required to pay a monthly fee, akin to a franchise fee, as it relates to this specific type of financing. There are many negatives when working with angel investors that are specifically seeking to take a piece of your month to month income. A breakdown of investment funds should be provided to potential funding sources that offer this highly specific type of financing vehicle.
You should always make sure, if you’re operating technology business (due to the fact that they carry high gross margins), that you have patent protection or copyright protection on your product. If you are already involved in the field that you’re working within, you may want to seek other professionals in your area that can become a potential investor in your business as they will most likely not need a month to month payment on their equity injection.
Technology-based businesses are highly prized by angel investors, and they are generally the most suited for royalty based investment purposes. Your CPA should review all financial statements related to angel investors, private equity firms, and other companies that are seeking to provide your business with royalty based investment. That financing is typically the least expensive route to take when you are looking for capital for your start up or expanding business.
In conclusion, royalty based financing may be an excellent alternative to selling a full direct equity stake in your business. As such, you and your financial advisers should review this financing model carefully to determine whether or not this type of financing is a good fit for your business.
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