Revenue-based Financing: When Should Royalty Payments Commence?

When should the payments on a Revenue Royalty Certificate  begin?

Since I get at least one email a week about this I will explain how the decision is made.

Suppose that an operating  company uses revenue-based financing to launch a new product. It raises $500K for the project in January with the launch date set for late June of the same year. If the new line won’t have any chance of producing revenues until  July then there’s nothing to calculate the royalty on until then. In this example, it would make sense to allow the company time to develop some momentum with the new line before extracting royalties. As a result it might make sense to hold off on all royalties till January (or November/December if Xmas sales are expected to be significant). Typically a moratorium on payments of a year is the maximum.

If the company is a pure startup the same reality applies. You can’t calculate royalties until there’s revenue. Moreover, if you found a way to extract your principal from it before it was generating revenues it’s highly likely that you would be doing your investment more harm than good.

So the answer is “No, royalties don’t begin 30 days after the loan is made.”