|
|
|
This article by Stuart Adams appeared in the Louisville Courier Journal Small Business Q & A on November 19, 1995, and was written for the Louisville Bar Association
Q: I am trying to start a small business. The main thing standing in my way is money. What is the best way for me to raise some money to start my business?
A: There are innumerable ways of raising money for a small business start-up or expansion. The availability of many of these methods depends upon the legal form of the business entity trying to raise the money. Stock, for instance is issued by corporations but not by sole proprietorships or partnerships. "S" corporations may only issue one class of stock, while "C" corporations may issue a wide variety of stocks, bonds and other financial investment incentives to finance their operations.
One of the first issues, however, is how much money is needed. A second issue is what the money is needed for and a third issue is the timing of the need for the money. All of these issues and many more should be covered in a business plan for the start-up or the project to be financed. Every business should have a written business plan containing certain basic elements. This is true whether or not the business is seeking financing, just so the owners know whether they are on track or their market has changed.
There are many excellent books and inexpensive software programs available, which will walk the business owner through the process of developing the business plan, reviewing it and modifying it down the road if necessary. Part of that process will involve an accurate projection of the need for money, broken down by time of need and purpose of the expenditures. You may find that you need more or less than you initially thought or you might be able to spread the need for money over time through a line of credit. You are unlikely to obtain successful conventional financing for your business without such a business plan, other than based on a personal collateralized loan.
One of the worst things a business owner can do is to borrow less money than is really needed to achieve the goal which initiated the quest for money. Undercapitalization can result in the business becoming substantially indebted but unable to get to the point of positive cash flow to make a profit or, perhaps, even to repay the loan. Probably a better "rule of thumb," since many people underestimate the final cost of their project, would be to over borrow through a higher line of credit, but to borrow against it over time and only as needed. You don’t have to spend it all, but you might find it a life saver to be able to reach your goal. If you have under borrowed, you may have pledged all your assets and be unable to borrow even a little bit more. This risks the disaster of losing it all.
Certainly the easiest loans are from one’s own assets, such as home equity, life insurance loans and pledges of other "hard" assets. Many conventional banks shy away from accounts receivables loans and other "promises." They also shy away from loaning you money to pay off other debts, such a back taxes. Keep your reason for borrowing positive.
Probably the next most common small business loans are from friends and family. These should be documented in writing with a promissory note for your sake and theirs. Many small business disputes arise over whether a payment of money to the business owner was a loan or for a piece of the business. This is particularly true in proprietorships and partnerships.
Keep in mind that when you borrow to finance your business, you will be giving up some control and, perhaps equity. Selling stock reduces the owner’s share of equity. Written buy-sell agreements can allow the founder to buy back the stock under favorable terms. The same is true of selling partnership interests and interests in limited liability companies.
If you need more money than can be raised from the sources mentioned above, check out the local economic development authority, the Small Business Administration, local venture capital club, or even the state venture capital sources. Beware of state and federal securities issues if you are marketing a piece of your business. There are strict requirements for certain types of offers of investment which could be classified as regulated securities. There are a number of exemptions from these requirements for small intra-state offerings. Beware also of losing your interest in your business. Many business founders have been squeezed out of their own business by creditors or investors who have gained control.
Venture Capital Sources Online
Louisville Small Business Development Center
|
Norton Commons® Office Prospect, Kentucky by appointment only |
|
THIS IS AN ADVERTISEMENT ©2014 Stuart Adams Law Office, P.S.C. |
|