X-Banker

Things You Need to Know About Raising Money for Your Business

October 1st, 2008

By The XBanker

Whether you have an established business in need of additional capital or are just starting out, you need to know about the benefits and limitations inherent in your financing options. The costs and risks involved in the first few years of operating a business may be frightening. Careful planning will help to reduce the risks. Facing realities about your business’s financing needs and diligently preparing your business plan will help you to overcome the costs involved. The investment community is not willing to grant loans or invest in your business unless you provide them with something worthwhile to invest in. The following considerations and suggestions will help you to gain the trust of investors and meet your business’s financial needs.

• Retain Accountant’s and Attorney’s services - Although the expense may seem burdensome at first, accountants’ and attorneys’ services will save you and your business money in the long run. The hourly rate of a competent advisor is little compared to the cost of losing your business or being held liable for the business’s mistakes. These advisors will help you to structure your business properly and take steps to help the business grow responsibly. Some accountants and attorneys even provide flexible payment options for young businesses.
• Establish the Necessary Structure - While many business entities are available that provide differing advantages, structural differences may affect your ability to obtain financing without losing control of your business. If you have any aspirations of developing your business into a publically traded entity, you will need to know about the structure of a C corporation. Before you approach your first investor, you need to decide the number of shares of stock to authorize, whether more than one class of stock will be necessary, and how many shares to retain yourself.
• Prepare Your Business Plan - The first step in your business’s search for financing, if not a preliminary step in creating your business, should be ensuring that you have developed your dream into a coherent, well-drafted business plan. Your business plan should provide potential investors with a comprehensive view of the structure of your business, your conclusions about the business, a realistic operating plan that you intend to abide by, potential risks the business may face, the position the business can pretty safely expect to be in over the next six months and over the next year, and possible the comments about your hopes for further developments. In addition to providing investors with valuable information, your business plan will cause you to focus your attention and force you to look at every opportunity and every risk that comes with it with a clear eye and a level head. Periodically updating your business plan will help you to gauge your progress and enhance your ability to make realistic predictions.
• Decide Between Loans and Equity Offers - Before considering financing, and possibly in the course of developing your business plan or through other research, you should gain an understanding of the costs involved in operating the business. Remember that many young businesses operate for at least three years without any profit. Unless you start your business with old money, you will need to explore the possibility of loans or raising money by selling partial ownership of your business in equity offerings. While loans may allow you to retain ownership and control of the business, often, institutional lenders will be hesitant to help finance a new business. Accordingly, the business may have to sell equity to meet its financing needs. Depending upon the business uses, this may be through the sale of shares of stock, membership interests, or partnership interests. In selling equity, you and your business must exercise care so as to prevent giving control of the business to investors and to ensure compliance with federal and state regulations affecting such sales.
• Differentiate Among Investors – Federal and state regulations affecting the sale of equity in businesses, generally referred to as securities regulations, differentiating among types of investors. Accordingly, in selling equity in the business, you and the business will need to differentiate between investors to ensure compliance with securities regulations. For most young companies, the investor of choice is an accredited investor. Generally, accredited investors have the financial resources and knowledge to rationally make business investments. Regardless of the type of investor involved, the business must make certain disclosures regarding the business’s financial resources and its business plan. Before accepting money from anyone, the business must know which type of investor it is dealing with, what the investor needs to make an informed decision, and which laws affect the transaction.
• Satisfy Continuing Obligations – Once the business obtains the initial financing it needs, it must manage its debts and obligations responsibly. As with a personal credit history, the business’s ability to satisfy creditors and manage its obligations may affect future financing options and prevent the business from being subjected to creditors’ lawsuits. Part of ensuring that the business will be able to satisfy its continuing obligations is ensuring that the business obtains sufficient financing from the start. By carefully and realistically planning for the business’s needs, you can help the business to achieve short-term and long-term financial stability.

Every business is unique. Your financing strategy should be based on your specific circumstances. However, success requires careful consideration of available alternatives. By considering your financing options and engaging in financial planning, you will ensure that you take advantage of available opportunities.

This entry was posted on Wednesday, October 1st, 2008 at 1:21 pm and is filed under General Financial. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

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