Business Contract Solutions | Hindi Speaking
HELPING YOU UNDERSTAND THE LEGAL ASPECTS OF FINANCING YOUR BUSINESS
One of the important tasks business owners face on a regular basis is how best to finance their business its various stages. As compared to organic growth, external financing can often allow a business to accelerate its development schedule, diversify its product line, capture new markets or expand its customer coverage.
There are two main types of financing available to businesses, namely debt financing and equity financing. Debt financing involves a business getting a loan on certain commercial terms where it does not provide any ownership to the creditor but agrees to pay the amount financed back over time in installment at certain interest rate and other payment terms. The source of such a financing may be private lenders such as friends and family, banks, angel investors, individuals, government-backed entities such a Small Business Administration (SBA) or private investment groups.
In comparison, equity financing involves selling part of the ownership in the company in return for the investment and the investor becomes part owner of the business. Similar to debt financing, there are a number of sources for equity financing depending upon the stage of the company and the size of the investment, such as friends and family, angel investors, venture capitalists, high net worth individuals, private family offices, etc. Often a business owner would bootstrap the business with personal funds to bring it to a stage where it is attractive to an external investor at the proper valuation that matches the owner’s objectives as to how much equity the business owner is ready to give up for the desired amount of investment.
There are numerous other forms of external investments which may include options, warrants, SAFE (simple agreement for future equity), bridge loans, convertible notes, etc. Furthermore, there may be preferences for the external investors and or conversion rights for their debt capital or preferred equity dictated by certain events or agreed upon timeframes.
What type of financing may be available to you or preferred by you depends upon your objectives, the stage of your business as to its products services, customers and markets, as well as the type of business, size of the investment, term of the investment, exit strategy for the business, growth prospects, target markets and market size, etc.
It is important for you to understand the pros and cons of the different types of financing available to you and the proper time at which to try to access the external investments as the wrong decision may be very costly in the long term. It is also important for you to have a good alignment between the types of investors and your short-term and long-term plans for growth, control and operations of the business.
Each type of investment may require multiple legal documents with multiple clauses that need to be well understood by you in order to avoid future surprises and ensure suitability of such documents with your long-term objectives for the business. It is important to have a trusted partner in a lawyer who can provide you not just the legal advice but also understand your business needs and provide the proper guidance to navigate the pitfalls associated with bringing external investment into your business.
Hunt Pennington Kumar & Dula PLLC’s principal attorneys have the experience of raising capital from external sources as business owners themselves and that enables them to be in a unique position to advise you in such transactions and better protect your business interests and achieve the right alignment of such external investments with your business plans. Our firm’s attorney can draft, review and negotiate these agreements on your behalf with the external parties and be a trusted member of your team in ensuring the success for your business venture.
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