Deciding whether or not to seek an advance on your royalties is a big decision that could have a major impact on your earnings and financial future.
The problem is that there are many hidden traps and pitfalls built into royalty advance deals.
These fine-print details are designed to trip you up and force you to pay far more than you expected to at the outset.
We've had a number of artists come to us after they signed a really bad advance deal to try and help them get out of it. We don't want that to happen to you.
In fact, there are three main traps that you can fall into if you're not aware. Here they are...
Trap 1: Paying far too much in interest
An advance is like a loan, which means you'll pay interest to the person that you borrow the money from. Before you sign any royalty advance deal, you need to understand exactly how much you'll pay in interest. If the deal doesn't explicitly state how much, in total, you'll pay in interest — that is a RED FLAG. We routinely see advance deals with an effective interest rate of more than 27%. We even saw one that had a 72% interest rate.
That's absolutely outrageous. It's a higher interest rate than most credit cards charge.
Before you sign any deal, make sure you understand exactly how much you'll pay in interest.
Trap 2: Not understanding the penalties
This is another topic that is easy to gloss over but can come back to hurt you. First, penalties are the extra money you'll end up owing the lender if certain payment goals aren't met. The biggest one that is an absolute killer is the early repayment penalty. This means that if you are able to repay your loan earlier than expected (such as if your catalog suddenly earns more money due to a popular sync for a major ad campaign), you may end up paying MORE in penalties.That’s because most advance lenders make money by the ongoing interest made from your loan. The earlier you pay it off, the less they make in interest.
We've seen this time and time again — early repayment penalties are bad news for you. One deal that we tried to help a songwriter get out of had a 53% early repayment penalty. Don't ever sign an advance deal that has an early repayment penalty.
Trap 3: Holding your rights hostage
The biggest lie royalty lenders tell artists is “you can keep all your rights.” The truth is, you can only keep all your rights if you pay back the loan on their terms. If not, they hold your rights hostage until they get their money. And with the layering on of the extra penalties and fees listed above, that could wind up far longer than the initial term of the loan.
We worked with a songwriter who had signed a small advance deal that should have taken him three years to pay off with the amount his catalog was earning in royalties at the time. But if his royalty stream had declined by just 10% over that time period, the resulting fees and penalties would have extended that payback period to 10 years, with no control over his rights in that timeframe.
What You Should Do Next
Now that you know the three major traps of royalty advance deals, you're ready to go raise the money you need to fund your next major project.
If you want to explore how Royalty Exchange can help you fund your career, we can connect you with more than 22,500 investors who want to invest in music royalties. Our new Term Advance option allows you to raise money with only the portion of your earnings you choose. And rather than paying back a fixed amount that can change based on circumstances, your royalties revert back to you after a fixed period of time... no matter what.
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