Business asset funders, Business Partners, have clarified the royalty clause in their loan agreements, which has caused frustration and led to several court cases involving clients in financial difficulties.

Business Partners provides asset finance of up to R5 million to established and viable businesses. The company says the royalty clause is a protective measure against defaulters.

A royalty agreement is a legal contract allowing the use of the owner’s intellectual property in exchange for royalty payments. Business Partners, established in 1991, signs off on loans up to a billion rand annually to help entrepreneurs finance business equipment. However, the company has faced criticism for the royalty clause in its loan agreements, although it has won all related court cases.

Executive General Manager for Impact Investing at Business Partners, David Marobe, says the clause ensures loan repayment if the client cannot make payments.

“It is a way of deferring repayments to match the cash flow of the business. In some instances, we know after doing an assessment of the risk involved in funding the particular transaction that this is the risk and this is the pricing that will match the risk involved in us undertaking or doing this transaction. But the cash flows of the business are not able to afford it today, so we can keep the interest rates maybe flat at maybe prime or prime plus one,” says Marobe.

Business Partners clarifies royalty clause in loan agreements

Marobe acknowledges client frustration but insists the clause is necessary.

“And we say from what we see in the cash flows from year two or year three, you’ll have made traction in the market and then there will be a clause that says: now a percentage of your sales at that level, when your cash flows permit, will cover a royalty in repaying us for the risk that we’ve undertaken in supporting you when times or where the business was not feasible or able to repay at that particular moment,” he adds.

Business Rescue Practitioner Mahier Tayob says royalties protect the financier, but some businesses question paying royalties after settling loans.

Tayob explains that during a business rescue process, businesses remain liable for these payments. “These royalties will continue but under post commencement finance. Whatever royalties were outstanding prior to business rescue is then ring fenced, anything post will be considered as post commencement finance and must be paid.”

Business Partners urges entrepreneurs to seek loans for specific purposes to grow their businesses and to understand the contracts they sign.