Starting a business is an exciting and rewarding venture. But it also requires careful planning and securing to get the necessary funding to get off the ground. There are many options to consider when it comes to financing a business, including equity financing, debt financing, and crowdfunding…but which is best for your business?
This article will explore each business financing option in detail and provide tips for securing your business’s funding to succeed.
Financing a Business: A Note on Legal Considerations Before We Begin
Before we explore some of the different business financing options at your disposal, it’s crucial to consider the legal implications of doing so. After all, asking people for money can trigger serious security laws consequences. This could expose you to civil and criminal liability if you don’t follow the process strictly.
Contact a Securities Lawyer About Business Financing
Why are we telling you this? Because, when seeking investment from others, you must include a lawyer who is well-versed in securities laws to help guide you through the process.
In truth, if there was a time to include a lawyer in your business, this is it!
A securities lawyer can provide valuable protection when you seek funding for your business. They can help you navigate the complex legal requirements and regulations related to raising money, such as offering securities or selling ownership stakes in your company.
How securities lawyers help when financing a business
A securities lawyer can also assist you in drafting documents such as offering memorandums or subscription agreements. They can also guide you in communicating with potential investors in compliance with the law. Ultimately, working with a securities lawyer increases the chances of a successful fundraising effort and reduces the risk of legal issues or disputes arising.
Many people believe they are sophisticated enough to handle the process independently. Unfortunately, this can be a risky assumption—as we’ve seen repeatedly. Following the laws and regulations related to raising money for your business is essential, as the consequences of failing can be severe.
So, trust us when we say no investor will accept losing their money, even if they knew the investment was risky.
How Do You Finance a Business?
Now that we’ve covered why it’s so important to work with a Denver business lawyer while you secure financing for a business, let’s discuss some of the different ways to get said funding.
Read about the dangers of comingling funds next.
Equity Financing
Selling ownership stakes to investors is one method of acquiring money through equity financing. This can be suitable for companies that still need to make money or have assets to use as collateral for loans.
Here are some common forms of equity financing:
1. Investments from family members
Many companies are founded with the help of investments from family members, who may be more prepared to take a chance on a new enterprise. Family members may be more understanding if the business takes off slowly, making this a viable alternative for startups. The investment parameters must be explicit, including the sum of money being committed, the percentage of ownership acquired, and any anticipated returns.
To ensure everyone is on the same page and safeguard all parties’ interests, ensure a formal agreement is in place.
We talk about why founders’ agreements are so vital in this article.
2. Crowdfunding
Crowdfunding is obtaining financial support from many individuals via an internet platform like Indiegogo, GoFundMe, and Patreon. This can be a fantastic choice for companies looking to develop a following of supporters who have a compelling story or product.
By enabling them to sell equity holdings to investors, businesses can now raise money more easily through crowdfunding, according to the JOBS Act of 2012. There are numerous crowdfunding platforms, each with its policies and costs. Doing your homework and picking a platform that works well for your company is crucial. To be sure you meet your fundraising target, you must also have a strong marketing and outreach strategy.
3. Venture capital/angel investors
For equity-based startup investments, high-net-worth people commonly turn to venture capital businesses and angel investors. These investors often look for companies with a lot of growth potential, and they can provide cash and valuable contacts and coaching. Finding and choosing investors who are a good fit for your business and who concur with your goals and values is essential.
It’s also wise to have a compelling pitch and business plan ready to show your business’s potential and negotiate the terms of the investment.
Debt Financing
With debt financing, the business borrows money it must pay back with interest.
Typical forms of debt financing include:
1. Money borrowed from friends and family
Many businesses start with loans from friends and family, who could be more prepared to lend at a lower interest rate or on more lenient terms. This can be an excellent choice when beginning a business and not being eligible for regular funding.
Still, it’s critical to understand the loan’s conditions, including:
- The sum being borrowed
- Interest rate
- Timeframe for repayment
A formal loan agreement is also wise because it will guarantee everyone is on the same page and safeguard their interests.
2. Loans from the Small Business Administration (SBA)
The SBA has several loan programs designed to make it easier for small businesses to acquire financing. Banks and other lending organizations often provide these loans. Often, they have better terms than standard loans, (think lower interest rates and longer repayment schedules). Want to boost your chances of acceptance? Carefully evaluating each program’s qualifying requirements and duration is a must.
3. Bank loans
Many banks provide small business loans. These can be a helpful alternative for organizations with a strong credit history and collateral to secure the loan.
Business owners can use them for various things, such as:
- Buying equipment
- Hiring staff
- Growing the company
Don’t skip reading the loan’s terms and conditions, including the interest rate, costs, and payback timeline. Finding the finest conditions also requires researching and comparing offers from several banks.
In Summary: Strategies for Financing a Business
Regardless of the type of financing you choose, please carefully consider your options to make an informed decision that’s right for your business. And don’t make this decision without legal guidance!
Seriously, don’t skimp here. Hire a business lawyer like those at Contiguglia Law! Call us today.
My book “Don’t Skip the Legal: The Startup Guide for Entrepreneurs and Business Owners” covers business financing and other vital legal considerations in much more detail. It’s available on Amazon—buy your copy today!
Did you learn a lot about financing a business today?
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