Investment and Business Loans
An initial consideration for any prospective business owner is financing. Often, the owner must raise capital so that the business can begin operation. The two most common forms of business capitalization are loans and equity investment. Loans generally involve borrowing from a commercial financial institution. Equity investment means that the business owner seeks out individuals to invest capital in his or her business. The equity investor, in exchange for his or her capital investment, takes ownership of a piece of the new business. Equity investment is essentially a financing path used to avoid a lending relationship with a bank. Both of these models have their advantages and disadvantages. To learn more about financing a business, contact our firm to schedule a consultation with an attorney.
Commercial Loans
Most lending institutions offer commercial loans. Before taking out a commercial loan, a business owner should consider the interest rate, the business owner's personal liability for the loan and whether the lender requires a security interest.
The interest rate on a business loan is variable. If a borrower is just starting a small business, he or she might want to consider working with the Small Business Administration (SBA), a federal agency that acts as a guarantor of loans through commercial lending institutions. However, there are interest ceilings that must be observed if the SBA acts as a guarantor.
Personal liability on the loan depends on how the company is organized. If the company is a sole proprietorship, the lender could sue the business owner personally in the event of a default. If the company is organized as a corporation or a limited liability company, the lender is required to sue the business upon default.
Often, a commercial lender will require that a security interest be offered by the borrower to protect the loan. This involves presenting an item of value as collateral such as a home, vehicle or business inventory.
Equity Investment
When soliciting investors for a business, the business owner should understand the consequences of equity financing. First, if the business is a sole proprietorship, taking on an investor will generally transform it into a partnership.
Second, by allowing investment in a business, an owner normally gives up exclusive control. This means that the investors are able to vote on the conduct of the business. Further, the investors can vote on the leadership of the business and be notified of all events that have an impact on the company.
Third, in some cases, an equity investment that creates a partnership will have to comply with securities laws. In exchange for the monetary investment, the investor receives securities as evidence of the investment. Normally, these transactions involve a large amount of paperwork and disclosure to a state securities commission. However, there are exemptions that target small companies. Before embarking on a business venture involving equity investment, potential investors and business owners should be familiar with state securities laws.
Conclusion
Choosing the proper source of capital can be difficult. There are advantages to both commercial loans and equity investment; the fundamental difference in the two options lies in the amount of control retained by the party starting up the company. If the venture is one that requires creative influence from the founder, then relinquishing control to investors may not be an option. On the other hand, if the company is founded on well-tested principles and there is a ready market for its services, avoiding loan payments may be an advantage. If you are faced with legal issues involving banking or finance, contact an attorney.
Copyright ©2009 FindLaw, a Thomson Business
DISCLAIMER: This site and any information contained herein are intended for informational purposes only and should not be construed as legal advice. Seek competent legal counsel for advice on any legal matter.
