So, royalty or mezzanine finance, you know, the best way to understand it is people know what debt is and you know what equity is and really royalty or mezzanine finance fits in between. It’s sort of a hybrid. It has elements of both debt and equity. Like debt, royalty is paid out of cash flow and over time. But it’s also similar to equity in that the amount of the debt that’s paid every month is based on the performance of the company. You don’t know upfront exactly how much that payment’s going to be, it aligns with the performance of the company. The better the company does, the larger the payment- so it’s similar to equity in that way. So really it’s a hybrid and royalty is a tool that can be used: it’s not better or worse than debt or equity, it is different. One of the advantages is that as a company, if you’re looking to grow and you’re not interested in selling in the next three to five years, equity may not be the right match. This is a way of raising some growth capital that’s risk tolerant. It’s a situation that you might not have collateral, be sufficient to get bank financing, or you might not have a sufficient track record to get bank financing. But if you’re not interested in or don’t have a plan to sell your business in the next three to five years, or the size of the upside when you do sell isn’t large enough to attract an equity investor, it doesn’t mean that it’s not a good business with a strong growth proposition.
So we at the community loan fund understood that there are businesses- good businesses that are here in New Hampshire- who sometimes get stuck and they hear from their bank that it’s too much risk, they’re not able to provide them that sufficient growth capital. But yet, they’re not interested in equity and we don’t want that to be the end of the conversation because if you’ve got a good strong growth proposition that just simply doesn’t fit the equity model or the bank model and you’re going to end up shelving that growth plan, doing so is bad for the business, it’s bad for the employees, it’s bad for our community and the economy. So we thought that by adding an additional choice, it improves the probability that we can get the right capital to the right businesses at the right time. So think of royalty as simply an additional choice, not necessarily- certainly inherently- it’s no better or worse than debt or equity, but my belief is that there is a right choice for every particular business scenario. So it’s up to the business and us to figure out what is the right match and I hope that by exploring royalty financing- you can find more information on vestedforgrowth.com to understand royalty better. It’s certainly an option to consider.
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