Want an advance? Seven red flags musicians need to watch out for

More and more artists are turning to royalty and asset-backed advances to fund their next project, and a growing number of startups are ready to write a check. But all advances are not created equal, so we have a rundown of what to watch out for.

by Peter Harvey, CEO & Co-Founder of RoyFi

Getting an advance on your royalties can be a very smart and strategic move. It’s also getting easier: Self-managed artists and small labels have more financing options than ever, thanks to the explosion in music usage data and changes to financial regulations. However, not all advance deals are created equal.

The cost of your deal should ultimately reflect the advance provider’s risk, but that is not always the approach. Sign the wrong deal, and you may wind up with something akin to the shady record contracts of old—minus the label services. To avoid this, you need to do the math and read the contract.

That can feel like an impossible chore, but with the right pointers, you can learn how to determine if a deal really makes sense for you. Music finance companies have to reveal their terms—but they may not be presenting the costs and risks in simple human language. This leaves lots of area for misunderstanding and confusion. Your relationship with your advance provider should be about supporting your success to minimize the advance provider’s risk. But if the provider wants to stack the deck in their favor, they may slip in a few clauses that can turn a reasonable deal into the equivalent of a payday loan.

Here’s what should raise red flags for you as you consider a deal, along with the language to look for in your terms.

1. Loan language: One of the simplest things to consider is what you’re actually borrowing or advancing against, i.e. what you’re using as collateral. Are you securitizing your assets (the rights to your work), which makes the arrangement more of a loan, or just the cash flow (the income from royalty payments) that is generated by those assets? Though most advance companies don’t do this, some can technically claim your rights if you can’t repay in time, the way a bank can repossess your car for non-payment.

Language to look for: Interest, APY, APR, Copyright, IRR

2. Fees: What are the fees in dollar terms? Are there things like processing fees involved in your deal? It’s likely your advance issuer won’t tell you straight up. That’s because some music finance companies use other ways to talk about how much they are charging you for your advance.

Language to look for: Fees of any kind, be it for “facilitation” or other mysterious purposes.

3. Percent recoupment: This benign-sounding percentage is the portion of your royalties that will go toward paying down or recouping your advance. The good news is that it can reveal how much you’re actually paying in fees: simply divide the amount of your advance by percentage recoupment, and you’ll see how much you’re really paying for the money you’re receiving.

Language to look for: Net royalty, Recoupment Rate, Discount Rate

4. Repayment/Termination terms: Say you’ve had a great quarter, gotten more income than you expected, and you want to repay your advance. Sounds like it would be a welcome development to your advance provider, right?

Not so fast. Many music finance companies include a prepayment penalty and they can be massive. If you are fortunate enough to sign a label or publishing deal and take an advance from them before you have paid off the advance, they may charge you up to 30% more than your current unrecouped balance, just to end the agreement. Worse, some companies will further punish you for signing a major label deal.

Language to look for: anything more than 100% repayment of the unrecouped balance. If you see a percentage above 100% related to recoupment, that’s something to investigate.

5. Overrides: Akin to prepayment penalties, overrides are sneaky little clauses that can take a piece of your future when you succeed. Some music finance companies insert an override into your terms that comes into effect if you sign a label deal. It allows them to automatically take a small share, 6% say, of your future earnings as part of that deal. This is not cool; just because they spotted you an advance doesn’t mean they own part of your business now, especially if you’re repaying them as promised.

Language to look for: Upstream, Early Termination, Major Label, Override, basically any calculation that gets you to the amount that you have to repay in order to end your relationship with the advance provider.

6. Term length: A longer repayment term may sound like a blessing, but it also puts you in a bind. If you’ve signed away future earnings, they are tied up for however many years you agree to. That big number may sound enticing, but the longer the term, the longer you’re tied to another party and the longer you have to make that advance last. The risk for the advance provider is actually greater, as the performance of your music may be harder to predict five or eight years down the road. Longer terms make for higher costs for you.

Language to look for: more than 2 years. Anything that lasts beyond full recoupment of the unrecouped balance.

7. Conflict of interest: If a music finance company is also brokering catalog sales, along with offering royalty advances, this may muddy their incentives. They may be tempted to put you in an overleveraged position, meaning advancing you more than they should. This could leave you in a financially vulnerable position, making you more likely to sell outright instead of managing your music for the long term.

Even if they don’t have lines of business that may conflict with giving you the best deal possible, they may have other misaligned incentives. Consider how the company you’re talking to is funded. If they have, for example, taken money from private equity or other tough-minded investors, they may be under the gun to turn and grow profits fast. This is not in your interest.

Language to look for:  Look at your prospective advance provider’s website to see what other business directions (marketplaces, catalog sales, etc) and what investment sources the company has. Take that into account as you examine your deal.

If you’ve gotten this far, you may be wondering if getting an advance is worth it. It is, and different deals will work for different artists and songwriters. If you want to speed up your cash payments to invest in things that will help build your career like touring, recording, and marketing, taking an advance can be a game changer. You need a partner who is deeply interested in your success, because your success will ensure the advance is repaid.

RoyFi is proud to be in the business of helping artists help themselves, and we realize that in the music business, every situation is unique. We hope these tips will help you make more educated decisions when it comes to financing your career.