The investor buys a percentage of your company's revenues in contrast to the more traditional method of buying a percentage of ownership in your company, and therefore profits/income. The investor gets paid regardless of the profitability of the company, and gets paid first, before taxes, debt service, and interest. The investor even continues to get paid if the company declares Chapter 13, a reorganization under the bankruptcy code. If there are sales, the investor gets paid. This is important to keep in mind when considering this type of financing.

There can also be an equity contingency: if the company is sold or goes public, the investor may have warrants or options that allow them to purchase, at below market rate, shares in the company. So the investor gets the best of both worlds, a regular stream of payments based on a percentage of sales of the company and the opportunity to buy very cheaply the stock of the company under advantageous terms.

Obviously this kind of financing is only appropriate for companies that have a high gross margin or low cost of goods sold. It's also easy to oversubscribe the company’s revenues. And it can make obtaining more traditional debt financing or an equity investor much more difficult.

Royalty financing is a little harder to find than more traditional financing. Start with your accountant and attorney. Ask your Small Business Development Center. Try your Chamber of Commerce and your bank. Search your local newspapers or business paper.