Financing a new business or venture can be achieved through several means. The best option for your and your startup depends on your own liquidity, goals, and projected profitability of your start up. Often, there are strict legal requirements that your startup must meet in order to properly receive funding. This article outlines several popular options for financing your business or startup.
Loans and Self Financing. Arguably the most traditional way to receive capital is either through obtaining a loan from your lending institution or your own savings. Loans from banks and credit unions provide the quickest way to access capital, however startups are often required to have a “guarantor” sign the loan as well. This means that, if your startup defaults on the loan, you (or the “guarantor” would be liable for the full balance of the loan. If you have significant savings, self financing may be more attractive. In either event, working with an attorney to properly structure the financing agreement and corporate organization of your entity is important to ensure you are protected from liability in the event the business fails.
Capital Raising. Federal and state laws permit startups and other businesses to raise capital through the issuance of equity ownership in the company (commonly shares of stock or membership units). However, there are significant restrictions on how you can solicit such investments. The Securities Act of 1933 requires that all sales of equity interest in a startup or business be either (1) registered with the Securities Exchange Commission (SEC) or (2) exempt from registration. The former option provides the most flexibility in terms of soliciting investments, but often requires more legal work. The latter is usually faster and more efficient (from a legal cost perspective), but most exemptions place limits on how you can solicit investors. Additionally, depending on the type of investor your are targeting, the requirements relating to information you must provide varies. Failing to comply with these requirements may result in liability, either through shareholder/investor lawsuits or investigations by the SEC or state securities agencies. Contacting an attorney should be your first step before meeting with potential investors to ensure that your actions are legal and sufficiently disclose the risk associated with investing in your startup.
If you’re interested in funding a startup or raising money for your business, contact Devin Bone to discuss strategies to achieve your goals. For a free consultation, call Devin at 248-782-7755 or complete our online contact form to set up a consultation.