Royalty-Based Financing
(life sciences)


  • Royalty-based financing is a loan in which repayment is based on the borrower’s future revenue. Rather than fixed payments, the payments fluctuate with the borrower’s revenue performance.
  • The loan payments are variable, the term is also variable. Payments are made until the lender receives a pre-determined multiple of the original loan or achieves a pre-determined internal rate of return (IRR).
  • Royalty-based financing originated in the energy and mining industries as a source of debt financing. From there, it expanded into the life sciences industry. In recent years, it has expanded into other technology as well as non-technology sectors.
  • The term “royalty-based financing” is often used interchangeably with revenue-based financing. At Find Venture Debt, we use “royalty-based financing” exclusively for life sciences since that industry has unique characteristics and lenders that primarily or solely focus on the sector.
  • The term “royalty” is used in multiple ways in life sciences financing. In many cases, a company’s drug or medical device is based on technology licensed from a university, research institute or inventor. The company is the licensee and pays a royalty to the licensor for rights to the technology.  However, royalty-based financing refers to a different type of royalty; the agreement between borrower and lender creates a new type of royalty that is based on a percentage of future revenue rather than a licensing agreement.  To avoid confusion, the share of future revenue is sometimes referred to as a “revenue interest” or a “synthetic royalty.”
  • Royalty-based financing can be structured in many different ways. In some cases, it may be classified as equity rather than debt.
  • The most common structure is a term loan, with the full amount advanced up front. Payments (which include principal and interest) are based on a fixed percentage of revenue or cash receipts from the prior month or quarter.


  • No minimum principal payments.
  • Minimal restrictive conditions.
  • Borrower does not have to be VC-backed.
  • Royalty-based financing is usually non-dilutive (i.e. the lender does not require warrants or other equity participation).


  • By definition, the borrower must be generating revenue.
  • The business should have strong gross margins since a significant percentage of revenue will be used for loan repayments.
  • There is no stated interest rate so the borrower must estimate the cost using an Excel model.

Typical borrower:

  • Life sciences company with FDA-approved drug or medical device.

Typical lender: