There are many ways record labels can try and exploit your lack of business knowledge. How the details work from a legal standpoint will give you peace of mind to do what is in your best interest. This isn't to say all labels take part in these unethical practices, but when it comes to you knowing all the facts you can make the judgement for yourself. We will cover a popular practice in the music industry called an advance. Below describes what an advance is, how it works, and how to use this knowledge to your advantage moving forward.
What Is An "Advance"
An advance is a pre-payment of royalties (sometimes called a "minimum guarantee"). The record label floats you an advance of money in order for you to pay engineers, market your music, and all the rest that comes from having a team of individuals to create and put out a professional release. In return for doing this the advance is to be recouped from your earned royalties to the record label.
How It Works
Say that Artist A was paid an advance of $10,000. That money would then be paid back to the record label when Artist A earns $10,000 from earned royalties. It works similar to a loan but no interest being charged to the artist when paying back the advance. If Artist A received the advance in 2010 but didn't reach $10,000 in earned royalties until 2020, Artist A would have had an "un recouped balance" up until 2020. If Artist A was making $1,000 a year from royalties during this time the record label would receive this amount in order to recoup the advance until the full balance is paid.
This is not a traditional loan you would receive that requires you to pay interest on the amount. It is no considered and should not be considered a "debt" to the record label or other party that gives you the advance. It is to be paid back from your earned royalties if and when your earned royalties reach this amount. In no way should you pay interest on this advance or pay in any other form than your earned royalties from your music. This money is advised to be used to progress the quality, value, and awareness of your music. To also be used with hiring the individuals who have expertise in making great music so that your career can thrive. Use only the amount that is advanced and to budget your project around this amount and this amount only.
An advance can have many positives for your music career. This money is intended to progress your music career. It should be used and understood that this money is to be paid back from your earned royalties to the label or other party that gave you the advance. Use this knowledge the next time you are presented with an opportunity to take an advance, but only if it falls under these guidelines.