Royalty Based Financing Agreement Template for Malaysia

A Royalty Based Financing Agreement offers an innovative alternative to traditional debt and equity financing under Malaysian law. This arrangement allows you to secure growth capital by agreeing to pay a percentage of your future revenue to the financing party, rather than fixed interest payments or giving up equity stakes in your company.

When do you need this document?

You need this agreement when seeking expansion capital without diluting ownership or taking on conventional debt. It's particularly valuable for technology companies, subscription-based businesses, or companies with predictable revenue streams who want to maintain control while accessing growth funding. This structure works well when traditional lenders view your business as too risky, or when you want to avoid personal guarantees typically required for business loans. The agreement is also useful for established companies looking to fund specific projects or market expansion initiatives without affecting their existing credit facilities.

Key legal considerations

The royalty calculation methodology forms the core of your agreement and must be clearly defined to avoid disputes. You need to specify the revenue base for calculations, whether gross or net revenue applies, and any exclusions such as returns, refunds, or inter-company transactions. Payment timing and frequency require careful consideration, along with information rights that allow the financing party to verify revenue figures. The agreement should address default scenarios, including payment deferrals during difficult periods and consequences of persistent non-payment. Consider including caps on total payments and step-down provisions that reduce royalty percentages over time or after certain payment thresholds are met.

Legal requirements in Malaysia

Under the Contracts Act 1950, your agreement must meet basic contractual requirements including offer, acceptance, and consideration. The Capital Markets and Services Act 2007 may apply if the arrangement constitutes a securities offering, requiring compliance with disclosure and registration requirements. Corporate capacity to enter the agreement must be verified under the Companies Act 2016, ensuring proper board resolutions and authority documentation. The Income Tax Act 1967 governs taxation of royalty payments, including withholding tax obligations that may apply to cross-border arrangements. If a financial institution provides the financing, compliance with the Financial Services Act 2013 becomes relevant. The agreement should include appropriate governing law and jurisdiction clauses specifying Malaysian courts, and consider whether stamp duty applies to the financing arrangement under the Stamp Act 1949.