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Tipps für Musiker

Advances: Career boost or debt trap?

September 13, 2018

The word advance is a common phrase in the music world and sometimes horrendous sums are passed around. Many musicians dream of a deal with a big advance – but is this really the hoped-for opportunity or is it more of a risk for the artist? We want to investigate these questions a bit more closely here.

Probably the most important and supposedly most logical thing first: an advance is not a gift. Labels don’t make gifts – why should they? As the name suggests, the money is only advanced and you could simply call it a loan. So be aware: every cent you get as an advance has to be paid back or brought in again under normal circumstances.

Are there any advances these days?

Short answer: Yes
Longer answer: Yes but they have become rarer and lower. The reason is relatively simple: The labels, especially the smaller ones, simply don’t have as much money available as they used to. Another reason is the production costs, which have become considerably cheaper, especially in the field of electronic music. In addition, it has also become more difficult for the labels to forecast sales in the streaming age. However, as streaming becomes more and more the norm, this is likely to change in the foreseeable future and may also have a positive impact on the level of advances. We can already observe a trend that major labels in particular are once again offering large advances for distribution deals more quickly. By the way, advances are not only granted by labels, but also by distributors.

What does it depend on if I get an advance?

A label will only sign an artist if it expects to earn money with him. They will calculate how much they have to spend on marketing and promotion and how much they think they can earn with your release. Based on these figures, a label will calculate if there is an advance and how much it will be. Despite these calculations, labels can make mistakes and as an insider told us, it happens more often than you would think that a release doesn’t recoup its costs. What this means for the artist, you can find out below.

What is the approximate amount of the advance?

It is almost impossible to give concrete figures, as there are many factors involved. This starts with the financial possibilities of your label or distribution, also depends on the type of contract and last but not least of course on your popularity, your previous sales and of course also a little bit of your negotiating skills. Roughly speaking, this begins with amounts in the low four-figure range and can also be in the six to seven-figure range for the top acts in the German-speaking world.

Why it is sometimes better to take a smaller advance or not to take it at all

Especially smaller labels don’t have enough money left for the promotion that would benefit your release after paying a big advance. So if you are offered a large advance, make sure that this is not at the expense of marketing and promotion. So sometimes it’s better if you don’t get an advance, but the label invests in you otherwise. It is important to think long term and not just to see the fast money. You should also always calculate whether it’s really worth signing with a label – whether you get an advance or not – or whether you’re not better advised as an independent artist. Large advances can also tempt you to spend your money faster or take more risks. For many artists, it feels like they don’t spend their own money, but at the end of the day they do. As I said, advances are not gifts!

When will I receive my advance payment?

If a label or distributor has decided to give you an advance, this is comparable to a loan. This is usually not paid all at once, but in tranches. For example 50% when signing the contract and 50% when the demos of the songs are finished and the studio work is coming up. If it’s a large amount, it can also be paid out in three or even more tranches.

A distinction must be made between two different types of advance:

  • Production cost grants: As the name suggests, these are earmarked and serve to pay for the costs of production (studio, mix, mastering etc.). Here it is recommended to keep the receipts so that you can show them and prove the expenses.
  • Advances on royalty payments: In most cases, the label is not telling you what the advances are used for and the money is therefore not earmarked.

What should I use my advance for?

The question should probably rather be what it should not be used for. Probably the least reasonable thing you can do with the money is to buy a big car or other consumer goods that have no connection to your music career. A large advance can of course be used to cover your living expenses and to pay the rent, so that you can fully dedicate yourself to music. The advance payment is intended primarily to cover studio costs, shoot videos or pay fellow musicians. But a healthy sense of proportion is also important. Just because the label or the distributor has advanced you the money, you don’t have to shoot a completely oversized video or rent the most expensive studio, which you actually wouldn’t need.

How do I pay back my advance?

Once your release is out, you will receive regular settlements from your label or distributor. There you will see your earnings, but with the remark that you will not get them paid out because the advance payment has to be recouped first. So you will only see some of the income of your release once the advance payment has been refunded. According to figures from IFPI, an advance used to be reimbursed within 18 months on average. Again, streaming has changed a lot and now it takes even longer than those one and a half years in most cases. So you have to be prepared for a long period of time without, or rather with significantly lower revenues.

This is especially true because cross-collateralizing has become the standard these days. In simple terms, this means that the advance payment is recouped with all the income the label participates in. So it’s possible that your advance is recouped with publishing rights, concert fees or merchandise (but usually not all of it). Two owners of an independent label explain this as follows: “In the meantime, the market has changed in such a way that it is hardly worthwhile to plan only according to the income from sales and streams. A contemporary artist is also much more comprehensive than the amount of his sales. We believe that sales no longer need to be the main point of revenue, but rather interact with live performances, merchandising and sponsorship.”

What many artists are also unaware of is that the advance payment is not recouped with the total income, but only through the artist’s share. Let’s assume that you have negotiated a 50:50 deal with a label and received an advance of 10.000 Euro. Until you have recouped the advance, you have to generate 20.000 sales to be able to refund the 10.000. So the lower your share of the revenue, the longer it will take until you have recouped the advance.

As an artist you should try to get a deal where only the income of the music is recouped. This way you don’t earn anything on sales and streams for a while, but at least money still flows regularly through concerts, merch etc.. However, such a deal without cross-collateralizing is anything but easy to negotiate, at least for artist contracts where the label bears practically the entire risk. The situation is often different with master recording agreement or distribution deals.

 

Here is a brief explanation of the three most common types of contract:

Master recording agreement: In this case the artist delivers the finished production (the master tape, therefore the name) to the label. With the master recording agreement, you transfer the rights to your product to the label for a pre-defined period of time and for clearly defined territories. In return you receive either a flat-rate amount, a share of the sales or a mixture of both. Often there is an option for one or more further releases. Who is responsible for further costs such as promotion and marketing is regulated separately.

Distribution agreement: This is usually signed over one album only, sometimes with the option of one or two additional albums. This often also without exclusive binding. These are concluded either with a distribution or a label. It is similar to the master recording agreement but with considerably less rights and obligations for the label / distributor. Therefore the artist share is by far the highest.

Artist’s agreement: This is where the closest bond between label and artist exists. Usually the label pays most of the costs of a release (incl. marketing and promotion) and thus also bears the financial risk. Accordingly, the artist’s share of the revenues is also lower than in the case of a master recording agreement.

In practice, there are more and more hybrid forms of these three types of contract. Especially because these three contracts are so different, it is not possible to define clearly what a fair artist’s share is. In some cases it may be justified if the artist only receives 15% of the income because the label bears all the costs and the risk. But in other cases 15% is also pure rip-off. A lot of things are simply a matter of negotiation. A music lawyer stated it to iGroove as follows: “Due to the developments of the last few years, it is indeed the case today that record companies are also participating in further money flows. Whether this is fair or not must be judged on a case-by-case basis. For certain productions, the recording companies themselves take great risks, so that a participation in further revenues or offsetting against them is not necessarily unreasonable. One really has to keep the big picture in mind: Who contributes what services, who invests how much, how big are the revenues to be made?”

What you should not forget in your calculation: If you have signed with a label, you get a much smaller share of sales and streams than if you distribute your album yourself via an aggregator. Let’s take as an example a song that is sold via iTunes for 0.99 Euro. With iGroove, the artist receives 0.69 Euro in this case (iTunes takes just under 30%, iGroove 8%). Depending on the deal, you may have to give a significant amount of money and time to your label as they invest time and money in your career, marketing and promotion. So if you calculate how much you have to sell until you recouped an advance, you should not start from the numbers you generated as an independent artist.

What happens if the income is lower than the advance?

This is probably the most fundamental question and therefore it is important to negotiate well from the beginning. The standard is that an advance is non-refundable. That means, if you don’t reimburse the advance, the remaining amount doesn’t have to be paid, so the label bears the economic risk. Contracts where the advance has to be paid back under all circumstances and therefore the artist bears the whole risk are not recommended. As already mentioned above, there are quite a few releases that do not recover their production and marketing costs. So you have to be very careful!

Record contracts often run over several albums and often there is a clause in the contract with “minimum fund” and “maximum fund”. If an advance was not recouped with the first album, the “Minimum Fund” applies to the next album. That means: the advance will be smaller (or even 0). If the advance was recouped with the first album, the “Maximum Fund”, i.e. the negotiated maximum amount, applies. The amount of your advance on the first album and its success can have a significant impact on your next release.

In most cases the minus of the first album has to be recouped with the second album. For example, if you have signed a deal for an album with an option for a second one, the contract will already state that the second album will also be recouped. In addition, it is often already stipulated in the contract that the advance payment for the second album will be renegotiated after the option has been exercised. One label representative explained to iGroove that the uncertain market situation makes it impossible to fix advance payments far in advance.

Here is a calculation example:
Let’s assume that you have received 20,000 advance payments for your first album, but you have only recouped 10,000 of them. But the label still believes in you and redeems the option for a second album, but with a lower advance of 10.000. That means with the second album you have to recoupe 20.000 again (10k from the first album and 10k from the second).

At this point a short digression on the subject of options: The basic problem with options is, of course, that the further course of an artist’s career cannot be predicted. As a newcomer, one is usually in a rather weak negotiating position. So if a newcomer signs a contract for an album with the option for a second one and then goes through the roof with the first record, he is sitting on a contract whose conditions are worse than those of an established artist. So he will also earn on the follow-up productions at the conditions of the first album. However, most of the labels will probably be willing to talk to you and improve the conditions, for example in connection with an additional option. It is also worth mentioning that in the 80s and 90s contracts were still being signed for five or even seven albums. Today this happens at most in absolutely isolated cases. Current contracts are mostly for one album, with the option of one or two additional albums. If at all: sometimes it’s even only about singles, until an album becomes an option at all.

But if you haven’t recouped your first album, there is of course the risk that you are quickly left without a record deal again because the option is not taken.

Get professional advice!

Negotiations with a label or distributor involve many financial and legal details, so it is advisable to consult a professional (e.g. a lawyer specialising in music). There are several reasons for this: He will prevent you from being ripped off if you are offered a much too small advance or the conditions are generally bad. But he can also advise you if the advance payment is too high, but there is hardly any budget left for the promotion of the release besides the advance payment. In general, you have someone at your side who can read the numbers the label gives you (or asks for the numbers if they don’t) and can advise you accordingly. He will help you to put the contracts, which are often written in legalese that is incomprehensible to ordinary people, into a comprehensible form. So have these contracts checked, because as an artist you often commit yourself for several years, so there are long-term consequences if you sign a bad deal!

It is also advisable to get support for the tax and social security situation, for example through a trustee. If you ignore these issues for a long time and muddle through somehow, you will be in for a nasty surprise at some point. It is therefore better to seek competent advice from the very beginning.

Advances from iGroove

As mentioned above, not only record companies but also distributors grant advances. So does iGroove. Our goal is to make the process as transparent as possible and offer fair conditions to the artists. As soon as the advance is recouped, 82% go to artists and 18% remain with the distributor. Furthermore, there is no fixed contract period – the contract can be terminated at any time as soon as the advance payment is recouped or after a maximum of two years. This means that an artist can also buy out of the current contract at any time, should he or she receive a better offer. He then simply has to pay the remaining amount of the advance.

You can easily request an advance in your iGroove account.

Conclusion

Of course it sounds good if you have the possibility to get a nice amount of money for your release and in many cases of course it is. But it’s important not to be blinded by the ” fast money” and to check the offer carefully and consider if it’s really beneficial for your own career, especially in the long run. As already explained in detail, expert support is highly recommended.

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