A career in the music industry is like a ride on the steepest, curviest, most unpredictable roller coaster in the world. There are so many moving parts, some of which you can control and the majority of which you cannot. Being involved with the hits and magical moments is amazing, but most of us exchange that for a life of trying to get through the rejections, fair weather friends, politics and dry patches with little or no money. In today’s streaming economy 99.9% of artists, producers, musicians and songwriters make less than 25 grand a year from sales or performances of their recorded music. I am not talking about the one tenth of one percent that hit the lottery here. So budgeting and cash flow management are critically important to keep your head above water.
Inevitably you will need some type of financing, be it a credit card, a loan or an advance. No shame here, it’s called LIFE. The problem is, as a self-employed music professional without significant assets (and probably some credit challenges), the banks won’t do squat for you and the finance companies and royalty advance companies will flat out take you to the cleaners. If you’re lucky enough to have a good relationship with your publisher, label, PRO or distributor, it’s still a big hassle to get an advance out of them and it always comes with strings attached.
So here are some words of wisdom from someone who’s been there:
- Make sure you understand the deal…all of it. The devil is truly in the details. Finance companies are in business to make a high rate of return on their money (25%-50% or higher). Why? Because they are a low volume business and they are not regulated like banks. Oh, and most are EGB’s (egregious greedy bankers), not music people. Rather than tell you upfront what the total cost of your advance will be they hide the true costs with smooth talking salespeople, (wolves in sheep’s clothing), and in the complex language of their agreements. Here’s an example:
XYZ Royalty Advance Company calls you every week and says they have a great offer for you, a $25,000 advance based on your catalog’s annual earnings of $10,000. Even better, they say you can keep half of your royalties, so you will have cash flow in the meantime. You ask what the rate is and they say only 10%. This could be the answer to your prayers…right? Not so fast.
Here’s where you have to get tough and ask smart questions:
- 10% for what term? Every three months, six months, or year?
- Is that a flat one time 10% fee or does the interest rate compound?
What is the difference?
Well, since you asked, if you are only repaying $5,000 per year on your advance it will take you seven years at 10% APR (annual percentage rate) to repay the advance. However, if it is 10% every six months then it will take you 39 years to recoup… no that’s not a typo! 39 YEARS! Are the warning sirens going off in your head yet?
Here’s the dirty secret: the finance company will always pay itself the interest and any fees you owe first, then apply what’s left over from your payment to the money it advanced you, which doesn’t leave much left to repay your advance. The longer it takes to repay the advance, the more it will cost you. Kind of like quicksand, the more you struggle, the faster you sink. At this rate, you will never recoup your advance and you will likely never get back control of your music.
Also be sure to ask:
- Are there any other fees charged for the advance (administrative, processing or legal fees)? Normally the answer will be yes.
- What happens if the earnings on your catalog go down (which they eventually will)? What rights are you pledging?
- Know who you are taking the money from. Ask your performing rights organization (PRO) (ASCAP, BMI or SESAC if you’re in the U.S., or the equivalent if you don’t) if they know XYZ company. The finance company will say they work with all the major royalty organizations, but that’s not to say that those same performing rights organizations will actually give them a good reference. Your PRO is your advocate and will look out for you. Also, do your homework. It’s as easy as Googling the company and the management of the company. While these finance companies have a great pitch and website, most have no real ties to the music industry. They simply try to look the part. In Nashville, we call them carpetbaggers.
- Don’t be rushed and do NOT sign anything without having your attorney or someone you trust review the advance agreement. Whether you’re dealing with recording or promoting a new album, trying to keep your head above water or some kind of personal emergency your primary concern is getting the money you need as soon as possible. And this is exactly when you are most vulnerable, where emotion can trump reason. It is imperative that you take the time to properly review the paperwork you are signing. If there is anything you do not understand and there absolutely will be then ask your attorney or a professional friend to explain. And for God’s sake, save a copy of everything you sign.
The finance industry has a very simple business model when it comes to royalty advances…separate you from control of your royalties and music permanently. The price they charge you is dependent principally on two factors:
a.) How unsophisticated you are in financial matters, and
b.) Your desperation. It can be a scary industry if you don’t ask the right questions and find the right partners you can trust.
There are a ton of good reasons to take an advance – marketing, tour support, managing a rough spot in your cash flow. And it’s your money after all, so you should have access to it. Just be aware of the true cost and do your homework!
As my good friend Benji Rogers says: Loving your work!
Eli Ball is founder and CEO of Lyric Financial. Founded in 2007, Lyric Financial is a financial services and technology company that provides innovative financing solutions (advances, loans, and more) to the global music industry. The company’s latest innovation, a virtual ATM platform, empowers creatives to tap into their catalog earnings in less than a minute. Lyric Financial announced a partnership with TuneCore in April 2017, offering artists use of the vATM through TuneCores Direct Artist Advance offering. Based in Nashville, TN, Lyric Financial will be announcing more partnerships soon. For more information about advances, loans, and the vATM, click here.