Kevin O’Leary, famously known as Mr. Wonderful from the Television series Shark Tank, is no stranger to business investments. He has built a small empire by investing in other businesses, as well as launching successful ventures of his own. One of the main financing tactics he uses when investing in other businesses is royalty based funding.
What Is Royalty Based Funding?
Royalty based funding is a simple concept, which has been used for decades. Investors will give businesses an infusion of working capital. In exchange, the business will repay the funding with a percentage of the revenue. The total amount repaid is typically some multiple of the initial investment.
Traditional Funding Structures
With traditional bank loans, businesses take on debt or trade equity for financing. Debt based loans impact business credit ratings, and locks entrepreneurs into rigid payment schedules. Equity based financing, on the other hand, involves the lender owning some part of the business for specified terms. In both scenarios, businesses risk something from square one, and are locked into rigid payment schedules, regardless of revenue.
Royalty Based Funding Stands On Its Own
The reason Mr. Wonderful loves royalty based funding is because it is a big win for both businesses and investors. Investors see a return on helping businesses succeed. Experienced investors will even offer guidance to help business owners avoid the pitfalls that many entrepreneurs stumble into. On the business side, entrepreneurs get the financing they need without debt or sacrificing ownership of their companies in any way. Additionally, since repayment of royalty based financing is structured around revenue, there are no rigid payment schedule. Royalty based funding provides financing and flexibility, which gives businesses the freedom to reach their potential, while simultaneously providing healthy returns to investors.
Royalty Based Funding It Not Venture Capital
One of the other reasons Mr. Wonderful likes royalty based financing is that it is not as risky as venture capital. Venture capital can place a strain on both business owners and investors. In a venture capital agreement, businesses relinquish equity at the outset of the agreement. This presents a risk to both the investor and business owner if the company hits some turbulence or delays in growth. Revenue based funding allows investors to purchase underlying stock or securities from the business, without entrepreneurs risking ownership or collateral.
Many new and growing businesses are seeking revenue based funding as a flexible alternative to traditional loans. Likewise, investors are leaning toward revenue based funding as a means to uplift small businesses and see a much more successful return than traditional financing structures. This trend will most likely continue for many years.